Admin September 1, 2023

Firstly, let’s start by explaining the off-payroll working rules (IR35).

Off-payroll working rules ensure that a worker (or contractor) pays the same Income Tax and National Insurance as a standard employee would. 

These rules apply if the worker provides services to a client through their own intermediary. This might apply to you if: 

• You are a worker who provides services through your own intermediary to a client
• You are a client who receives services from a worker through their intermediary
• You are an agency or supplier providing services through an intermediary

 A worker may provide their services through a limited company, a partnership or another individual.

When Do IR35 Rules Apply?

The off-payroll rules apply if a worker is offering services through a limited company, or similar. The person responsible for determining whether the worker is employed for tax purposes depends on whether the client is in the public sector/in the private or voluntary sectors/a small business. 

What Happens If The Rules Do Apply?

The party who is responsible for applying the rules must decide if the worker is employed for tax purposes. A worker’s employment status for tax will determine the tax that the worker and the employer are required to pay.

If the worker is deemed to be employed for tax purposes, the employer must deduct Income Tax and National Insurance. 

How Does MSC Legislation Come In?

MSC legislation is even more of a minefield than IR35 legislation. 

The MSC legislation was introduced in 2007 to combat perceived ‘tax avoidance’, where contractors were enjoying the tax perks of working through a limited company, without having the burden of running that company. 

MSC legislation works in a similar way to IR35. If HMRC decides that a contractor seems to be part of a managed service company (MSC), all payments will be reclassified as employment income, which will then be subject to PAYE and NIC. 

HMRC have been chasing contractors for backdated tax, suspicious that these contractors are Managed Service Companies and their accountants MSC providers. If you receive a letter from HMRC, get in touch with our accountants who can recommend the best course of action.

How Is This Legislation Received?

This type of legislation has actually been in place since 2005, but since then it has been heavily criticised by tax and business experts, who believe it is poorly conceived and badly implemented. Experts also believe it causes unnecessary costs and hardships for genuine small businesses, who are expected to contribute PAYE and NIC for contractors.

If you are a genuine contractor, freelancer or consultant who is in business on your own, you should have nothing to fear from IR35/MSC. You just need to familiarise yourself with the legislation and best practices, to ensure they do not apply to you.

And, for firms that hire contractors, you just need to take the correct steps when hiring and employing contractors, to ensure you are paying them by the book. If you have any concerns about paying contractors, get in touch with our accountants who can manage payroll for you!

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