The IR35 Public Sector Reform and Private Sector Reform are legislative changes implemented by the UK government to address tax avoidance and ensure fair taxation for contractors working in both the public and private sectors.
Under the IR35 Public Sector Reform, which came into effect in April 2017, the responsibility for determining the employment status of contractors shifted from the contractor to the end-client, which is typically a public sector body.
The end-client is now responsible for assessing whether a contractor should be treated as an employee for tax purposes, taking into account the nature of the engagement and the contractor’s working relationship with the organization.
This reform aimed to tackle the issue of “disguised employment” where individuals work as self-employed contractors but perform roles similar to employees, thereby avoiding higher tax and National Insurance Contributions (NICs) obligations.
Building on the success of the public sector reform, the government extended similar changes to the private sector with the IR35 Private Sector Reform, effective from April 2021. Under these reforms, medium-sized and large businesses became responsible for determining the IR35 status of contractors they engage.
The end-client must assess whether the contractor’s working arrangement is akin to that of an employee and apply the appropriate tax and NICs deductions.
This reform aimed to create consistency in tax treatment across sectors and ensure that individuals working as contractors are appropriately taxed based on the nature of their work
What do the IR35 Public and Private Sector Reforms mean in practice?
The IR35 Public and Private Sector Reforms have significant implications for both contractors and the authorities engaging their services. In practice, these reforms mean the following:
IR35 Public Sector Reform:
- The responsibility for determining the IR35 status of contractors shifts from the contractor to the end-client (public sector body).
- The end-client must assess whether the contractor’s engagement resembles that of an employee and apply the appropriate tax and NICs deductions if the contractor is deemed to be inside IR35.
- Contractors found to be inside IR35 will be subject to NICs and Income Tax deductions.
- The “Check Employment Status for Tax” (CEST) tool developed by HMRC is available to help with the determination process.
Authorities in the public sector that may be affected by IR35 include:
- Governmental departments
- National Health Service (NHS)
- Fire and police departments
- Broadcasting organizations like the BBC
- Channel 4
IR35 Private Sector Reform:
- Medium-sized and large businesses in the private sector become responsible for determining the IR35 status of contractors they engage.
- The end-client needs to assess the contractor’s working arrangement and apply the appropriate tax and NICs deductions if the contractor is classified as inside IR35.
- The CEST tool can be used to aid in the determination process.
Authorities in the private sector that may be affected by IR35 include various businesses and organizations across industries, such as:
- Financial institutions
- Technology companies
- Consultancy firms
- Media and entertainment companies
- Retail organizations
Overall, the IR35 reforms require both public and private sector authorities to carefully assess the working relationships with contractors and determine their IR35 status in order to ensure appropriate taxation and compliance with the legislation.
The IR35 reforms have indeed had a significant impact on the tax and National Insurance liability of contractors, leading many to reconsider their operating structures in order to optimize their take-home pay. As a result, some contractors have made the decision to transition from self-employment to employment status, effectively closing their limited company. If you find yourself in this situation and need guidance on the process, it is important to consult with a licensed insolvency practitioner who can provide advice and explore available options for solvent liquidation.
Conclusion
If you are contemplating closing your limited company as a response to the IR35 changes and are seeking a more tax-efficient way of working, it is advisable to reach out to a licensed insolvency practitioner who specialises in such matters. Our nationwide offices have experienced professionals who can assist you in exploring the best solvent liquidation options, including Members’ Voluntary Liquidation (MVL), tailored to your specific circumstances.
By engaging our services, we can help settle any outstanding affairs with creditors prior to closing your limited company. Our expertise in IR35 liquidations ensures that we can navigate the complexities of the process while aiming to maximize the tax efficiency and cost-effectiveness of extracting the funds tied up in your company.
Contacting our licensed insolvency practitioners will allow you to receive personalised guidance and advice on the most suitable course of action.
We can assist you with the necessary procedures, paperwork, and compliance requirements involved in closing your limited company in a solvent manner.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.