What is IR35?
First introduced in April 2000, this legislation aims to tackle tax avoidance by workers and the firms hiring them, who supply services to clients via an intermediary, such as a limited company (often called a ‘personal service company’), but who would be an employee if the intermediary was not used.
There are currently different rules for public and private sector contracts. For private sector contracts, the contractor is responsible for working out whether they fall inside or outside IR35 and pay the tax and National Insurance Contributions (NICs) accordingly. This is due to change, from 6 April 2020, with more responsibility shifting to large and medium companies to administer IR35.
Who will it affect?
- Workers who provide services through their intermediary;
- Clients (all public companies and private sector medium or large companies) that receive services from workers through their intermediary; and,
- Agencies who provide workers’ services through their intermediary.
The size of a company will be determined by the definitions in the Companies Act 2006. In simple terms, private sector companies that currently need an audit are likely to be affected.
What must you do?
To meet HMRC requirements, Clients will need to:
- Identify the number of workers they have that provide services through their intermediary;
- Decide the employment status of each worker for every contract agreed with an agency or worker and issue a Status Determination Statement (SDS), informing all entities in the labour supply chain with reasons whether or not payment for the work will need to be made with deduction of tax and NICs;
- Provide the SDS (with reasons) to the worker and any organisation it contracted with; and,
- Maintain records and have dispute resolution processes in case the worker or organisation disagrees with its determination. There is no appeal option to HMRC.
HMRC has imposed an obligation to take “reasonable care” when making a determination about the employment status of a worker. This is not defined and, given the tax difference is potentially up to 25%, the exercise will be costly if the determination is incorrect.
If the determination concludes that off-payroll rules apply, i.e. the worker would be an employee if there was no intermediary, fee-payers will need to deduct and pay tax and NICs to HMRC.
Special rules apply to individuals found through and paid via a recruitment business, as the recruitment business will then have to assess and deduct tax.
Employment status test
The determination process will involve a review of the contract terms between the parties as well as the actual working practices.
Whilst HMRC has a free ‘check employment status for tax’ (CEST) tool, this has been widely criticised for missing key elements, being weighted in favour of employment and not providing for undeterminable (‘I don’t know) answers.
In respect of case law, there are three headline tests which consider:
- Degree of control;
- Personal service; and,
- Mutuality of obligations.
Currently contractors in the private sector are paid gross, with no tax risk for the recipient using their services. These new rules shift the risk and responsibility to those recipients. Companies will need to take the new rules seriously, expending financial, legal and HR resources to meet the reasonable care threshold. If the working practices of the engagement change or new contracts are agree, the rules will need to be revisited.
Businesses should prepare now, considering where they should take contractors on as employees and where they still require a flexible skilled workforce that can be scaled up or down quickly.
All our articles are intended for informational purposes only and do not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information provided.