QUESTION: I am an IT contractor working for a small number of large companies. I have my own personal service company to provide services. My customers are seeking to apply IR35 however I understand that there has been a change to this legislation announced in the recent mini budget?
ANSWER: The IR35 legislation applies to individuals who seek to sell their services via a limited company rather than be employed on a payroll. There is a considerable advantage to selling services via a company for both the contractor operating through the company and the party that has engaged the company to perform the services because such an arrangement bypasses the traditional employee/employer relationship which is taxed under the PAYE system and attracts national insurance.
The abuse of personal service companies was highlighted in recent years with a number of high-profile individuals providing their services to organisations such as the BBC via a company rather than being on payroll. Although a small number of these people have successfully challenged the ruling that they were employees, the arguments have gone largely in favour of HMRC in the past number of years.
An individual operating through a personal service company but with only one main customer for whom they provide full time services is highly likely to be caught by the IR35 legislation. However, if you are providing services to several customers you may fall outside the legislation.
HMRC had considerably strengthened the IR35 legislation in 2017 for public sector workers by putting the onus on the employer to determine whether or not an individual was genuinely self-employed and not an employee. In 2021, this change in the legislation was extended to large private sector employers.
The recent mini budget plans to repel this reform by reversing the changes made for both public and private sector workers in the past. The reason this has been reversed is that many large companies retaining the services of the contractors had taken a prudent approach forcing all contractors inside IR35 whether or not they failed employment status tests.
It is estimated that over 150,000 freelance contractors have ceased self-employment as a result of the previous IR35 legislation.
From April 2023, it will be back to the contractor to determine their own employment status and you will therefore need to self-assess yourself as to whether or not you fit the criteria of self-employed and therefore are outside the scope of PAYE.
The relevant factors in making this decision include the degree of control over work that you will do and hours that you will work; whether or not you provide your own equipment; if you cannot do the work yourself can you provide a substitute?; do you have any entitlement to holiday pay, sick pay etc. and you work for a number of different customers or just a single customer?.
It remains to be seen how large businesses will react to the reversal in these rules and whether they will insist on putting contractors like yourself on payroll or whether they will accept them as contractors and pay them through their personal service company.
Finally, as this change has not yet passed through Parliament, you should keep an eye on its progress as we could see yet another mini-budget U-turn!
Paddy Harty (p.harty@fpmaab.com) is partner at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
