IR35 and payroll rules for employment in the UK – detailed business guide

In the UK, payroll and employment law are governed by a number of different regulations. If you’re an employer, it’s important to be aware of all of these rules and ensure that your payroll process is compliant.

One particularly complex area of payroll law is IR35. In this article, we will provide a complete business guide to IR35 and payroll in the UK. We’ll answer all of your questions about how IR35 works and what you need to do to stay compliant with the law.

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What is IR35?

Payroll compliance may be a challenging and time-consuming process. This is particularly true when it comes to IR35, a set of regulations that govern the employment of contractors in the UK. If you’re an employer or responsible for payroll administration, it’s essential that you have a clear understanding of IR35 and how it affects payroll.

IR35 is a piece of legislation that was introduced in 2000 to ensure that workers who are classed as contractors for tax purposes are treated in the same way as employees for tax purposes.

Why was IR35 introduced?

IR35 was introduced in order to ensure that businesses were paying the correct amount of tax on workers who were classed as “contractors”. It aimed to prevent businesses from avoiding payroll taxes by incorrectly classing their workers as self-employed.

What are the rules of IR35?

The key rules of IR35 are as follows:

• The worker must be self-employed for tax purposes
• The work must be done through a limited company or partnership
• The worker must have control over their own working hours and how they complete their work
• The worker cannot be permanently employed by the client organisation

How does IR35 work?

If you’re an employer, you need to determine whether or not your workers are considered “employees” or “contractors” for tax purposes. This is done by looking at a number of factors, including the level of control you have over how they work and whether or not they are paid through PAYE.

If your workers are considered “employees”, then you will need to deduct income tax and National Insurance from their pay. If they are considered “contractors”, then you will not need to deduct any tax from their pay, as they will be responsible for paying it themselves.

What does IR35 status depend on?

There are a number of factors that will determine whether or not your workers are considered “employees” or “contractors” for tax purposes. These include:

• The level of control you have over how they work
• Whether or not they are paid through PAYE
• Whether or not they are permanently employed by you

Who is exempt from IR35?
There are a number of workers who are exempt from IR35. These include: ✓ Workers who are genuinely self-employed ✓ Workers who are employed by an agency and supplied to you as contractors ✓ Workers who are seconded to you by their employer on a temporary basis

Top 10 ways to fail IR35 tests

There are a number of ways in which you can fail an IR35 test. Here are the top ten:

1. Not having a clear understanding of IR35 and how it works
2. Failing to correctly assess the employment status of your workers
3. Incorrectly classing your workers as “contractors” when they should be classed as “employees”
4. Not deducting income tax and National Insurance from employees’ pay
5. Paying workers through a limited company or partnership when they should be paid through payroll
6. Allowing workers to control their own working hours and how they complete their work
7. Permanently employing workers who should be classed as contractors
8. Not issuing contracts or payroll paperwork to workers
9. Not keeping adequate records of payroll and employment law compliance
10. Failing to seek professional advice when in doubt about IR35 compliance

Who does IR35 apply to?

IR35 applies to businesses that use workers who are considered “contractors” for tax purposes. This means that businesses must make sure that these workers are paying the correct amount of income tax and National Insurance.

When did IR35 come into effect?

IR35 came into effect in April 2000. Chapter Ten of ITEPA is the section that deals with payroll. This section includes a number of rules and regulations that businesses must follow in order to ensure compliance with IR35.

Important IR35 changes in April 2021
In April 2021, the rules of IR35 changed. The changes meant that businesses are responsible for determining the employment status of their workers for tax purposes. This was a significant change, and businesses needed to be prepared for it.

What is a ‘personal service company’?

A personal service company (PSC) is a limited company or partnership that provides services to another business. The PSC must be registered with HMRC and will need to submit a self-assessment tax return every year.

Using a personal service company (PSC) in IR35

If you’re using a personal service company (PSC) to provide services to another business, then you need to make sure that the PSC is compliant with IR35. This means that the PSC must be registered with HMRC and will need to submit a self-assessment tax return every year.

What do I need to do if I’m an employer?

If you’re an employer, you need to make sure that you’re aware of the changes to IR35 and how they will affect your business. You should speak to an accountant or payroll specialist to get advice on how to comply with the new rules.

You also need to ensure that your payroll process is compliant. This means making sure that you’re correctly deducting income tax and National Insurance from your workers’ pay, and that you’re keeping accurate records of their payroll.

IR35 in the public sector

The rules of IR35 are slightly different in the public sector. The key difference is that, in order for a worker to be considered self-employed for tax purposes, they must meet all three of the following criteria:

• They must be working under their own control
• Their work must be done through a limited company or partnership
• They must not be permanently employed by the client organisation

If a worker meets all three of these criteria, they will be considered self-employed for tax purposes, even if they are paid through PAYE.

How does payroll work with IR35?

Payroll and employment law are closely intertwined, and the payroll processing must be compliant with IR35 if your workers are considered “contractors” for tax purposes. This means that you will need to make sure that your payroll process is correctly classifying your workers and that you are not deducting any tax from their pay.

Payroll works with IR35 by deducting income tax and National Insurance from employees’ pay, but not from contractors’ pay. This is because contractors are responsible for paying their own income tax and National Insurance.

What does an employer need to know about IR35 when running a payroll?

If you’re an employer, there are a few key things you need to know about IR35 and payroll:

• You need to determine whether or not your workers are considered “contractors” for tax purposes
• You need to make sure that your payroll process is correctly classifying your workers and that you are not deducting any tax from their pay
• If your workers are considered “contractors”, you must ensure that they are paying the correct amount of income tax and National Insurance
• You must keep records of how you have classified your workers for tax purposes
• If you’re an employer, it’s essential that you are aware of all the payroll and IR35 regulations that apply to you

Keep in mind that payroll compliance is a nuanced topic, and it’s always best to consult with an expert if you have any questions.

What are the risks of non-compliance with IR35?

There are a number of compliance risks associated with payroll and IR35. These include:

• Incorrect classification of workers as employees or contractors
• Failure to deduct the correct amount of payroll tax from workers’ pay
• Late or incorrect filing of payroll taxes
• These risks can lead to costly penalties and fines. It is important for businesses to ensure that they are correctly classifying their workers and making the correct payroll tax deductions.

The risks of non-compliance with IR35 can be significant. These risks include:

• Financial penalties from HMRC
• Reputational damage
• Difficulty in securing contracts
• Investigation by HMRC

By understanding the risks associated with IR35, businesses can protect themselves from these risks and ensure compliance with the legislation.

What penalties or fines might a business incur for failing to adhere to IR35 laws?

If a business fails to adhere to IR35 laws, they may be subject to a number of penalties or fines, including:

• The workers may be liable for payroll taxes
• The employer may be liable for payroll taxes
• The employer may be subject to penalties for failing to deduct payroll taxes from the workers’ pay

What is the difference between a contractor and an employee?

The main difference between a contractor and an employee is that contractors are self-employed for tax purposes, while employees are not. This means that contractors are responsible for paying their own income tax and National Insurance, while employees have these taxes deducted from their pay.

What should an employer do if it’s unsure whether or not a worker is classed as a contractor?
If an employer is unsure whether or not a worker is classed as a contractor, they should seek advice from an expert such as a payroll bureau.

Does a business need to submit any documents to HMRC pertaining to IR35?

A business does not need to submit any documents to HMRC pertaining to IR35. However, it is advisable to keep records of how you have classified your workers for tax purposes.

What about off-payroll working?

Off-payroll working is when a worker is classed as a “contractor” for tax purposes, but they work for an employer. This means that the employer does not have to deduct payroll taxes from the worker’s pay. Instead, the worker is responsible for paying their own income tax and National Insurance.

What’s the difference between inside IR35 and outside IR35?

The difference between inside IR35 and outside IR35 is that inside IR35, the worker is classed as an employee for tax purposes, while outside IR35, the worker is classed as a contractor. This means that payroll taxes must be deducted from the workers’ pay if they are inside IR35, but not if they are outside IR35.

How to be outside IR35?

In order to be outside IR35, a worker must be self-employed for tax purposes. This means that the worker is responsible for paying their own income tax and National Insurance. The employer does not have to deduct payroll taxes from the workers’ pay if they are outside IR35.

What’s the difference between payroll and IR35?

The main difference between payroll and IR35 is that payroll applies to workers who are employees for tax purposes, while IR35 applies to workers who are contractors for tax purposes. This means that payroll taxes must be deducted from the workers’ pay if they are employees, but not if they are contractors. payroll and IR35 are two different concepts, but they both relate to the taxation of workers.

Who is responsible for working out employment status?

The employer is responsible for working out employment status.

What factors are considered when determining employment status?

There are a number of factors that are considered when determining employment status, including:

• The level of control the employer has over the worker
• Whether or not the worker is paid by the hour, week, or month
• Whether or not the worker is required to work a set number of hours
• Whether or not the worker is able to subcontract their work to others
• How much training the worker has received from the employer

What payroll tax deductions are made if a worker is classed as an employee?

If a worker is classed as an employee, payroll taxes must be deducted from their pay. This includes income tax and National Insurance.

As an employer, it is important to have a clear understanding of payroll taxes and how they work. Payroll taxes are deductions that are made from an employee’s pay, and these taxes go towards supporting social welfare programs like unemployment benefits and health insurance. In the UK, payroll taxes are known as National Insurance contributions (NICs). There are two types of NICs:

• Class A NICs
• Class B NICs

Class A NICs are contributions that are paid by employees, while Class B NICs are contributions that are paid by the self-employed.

In addition to National Insurance, employers must also deduct income tax from an employee’s pay.

What payroll tax deductions are made if a worker is classed as a contractor?

If a worker is classed as a contractor, payroll taxes do not need to be deducted from their pay. However, the contractor is responsible for paying their own income tax and National Insurance.

What legislation governs IR35?

The legislation that governs IR35 is the Income Tax (Employment) Act 2002.

Is it most beneficial for a business to put employees on payroll, or hire external contractors?

There is no definitive answer as to whether it is most beneficial for a business to put employees on payroll, or hire external contractors. This will depend on a number of factors, including the type of work that needs to be done and the level of control the employer has over the worker.

However, it is generally more expensive for a business to put employees on payroll, as payroll taxes must be deducted from the workers’ pay.

On the other hand, hiring external contractors can be less expensive, as the contractor is responsible for paying their own income tax and National Insurance. Ultimately, it is up to the business to decide which option is best for them.

Are IR35 contractors entitled to paid holiday?
Yes, IR35 contractors are entitled to paid holiday. The amount of holiday entitlement will depend on the number of hours worked.

Does a contractor pay more tax than an employee on payroll?

There is no simple answer to this question, as it will depend on a number of factors, including the worker’s income and the payroll tax deductions that are made.

However, generally speaking, contractors pay more tax than employees on payroll. This is because payroll taxes must be deducted from the workers’ pay if they are employees, but not if they are contractors.

Contractors are also responsible for paying their own income tax and National Insurance, which can be a costly process.

What is an intermediary?

An intermediary is a company that provides payroll and HR services to businesses. This company will be responsible for working out employment status, and will ensure that the correct payroll tax deductions are made if a worker is classed as an employee.

An intermediary can be helpful for businesses who do not have the time or resources to manage their own payroll.

What should a company do to get started with IR35?

There are a number of steps that a company should take to get started with IR35. These steps include:

1. Understanding the legislation that governs IR35
2. Determining whether or not a worker is classed as an employee or contractor
3. Working with an intermediary to ensure payroll tax deductions are made correctly
4. Reviewing any contracts that are in place with workers to ensure they comply with IR35
5. Putting procedures in place to ensure compliance with IR35.
6. By following these steps, a company can ensure that they are compliant with IR35 and protect themselves from any potential risks.

What are the best IR35 consultancy companies?

There are a number of IR35 consultancy companies that can provide assistance to businesses. These companies can help businesses to understand the compliance risks associated with IR35, and can provide advice on how to best protect the business from these risks. Some of the best IR35 consultancy companies include:

• Cuffe payroll
• Intermediary Solutions
• Employment Status Solutions
• Qdos Contractor

How much does it cost to hire an IR35 consultancy firm?

The cost of hiring an IR35 consultancy firm will vary depending on the size and complexity of the business. However, it is generally advisable for businesses to budget for around £500-£1000 per year for IR35 compliance.