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IR35: Contractors to dispute employee status

Since off-payroll working rules went into effect April 6, nearly two-thirds of contractors have been classified as “employed for tax purposes,” The Financial Times reported [1]. However, half of those contractors plan to challenge their classification, suggesting the reforms are likely to spark a wave of disputes between businesses and contractors.

The UK’s IR35 Off-Payroll Working Rules place the responsibility for assessing the employment status for tax of contractors working “off-payroll” on the entities using the contractors’ services. Initially, it applied to public entities but in 2019 the UK government issued proposals to expand the rules to apply to midsize and large private organizations. Those changes were initially slated to go into effect in 2020, but were delayed due to Covid-19.

As of April 6, where contractors personally perform services through their personal service company, or PSC, the responsibility for correctly applying the rules falls on the public-sector body or the medium or large organization engaging the PSC (“the client”). If the client determines the contractor to be inside IR35, either the client, a staffing agency or other third party paying the contractor’s PSC (the “fee-payer”) is required to deduct any income tax and employees’ National Insurance Contributions from income deemed to be earned from employment from gross fee payments made to the PSC.

For more information on the rules, CWS Council members may access SIA’s report, “IR35 Off-Payroll Working Rules: Updated FAQs for Buyers.” [2]

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