Update: 2022
In October 2022, the Government announced that they indeed to repeal IR35’s 2017 and 2021 updates to “simplify” the rules. Those effected by status questions should bear in mind that, whilst this impacts their taxation, a contractor may still be found to be an employee or a worker in the Employment Tribunal and therefore be granted the protections this offers.
Yesterday, the Government announced that the extension of IR35 to medium and large companies in the private sector is being postponed by a year, to 6 April 2021, in an effort offer some support to self-employed contractors through the financial uncertainty caused by coronavirus. Given the economic challenges that lie ahead, it is helpful that further uncertain tax changes haven’t been rolled out now, further endangering people’s income. This means that the below changes will not come into play for at least a year.
If you do have any questions, please do get in touch. If you have any questions about the virus itself and its consequences for employees and employers, we have a blog here which we are constantly updating, or you can email coronavirus@thrivelaw.co.uk
What is IR35?
IR35 are the “Off-payroll working rules”, and were introduced in 2000 to combat what’s termed “disguised employment.”
It is essentially the tax legislation which allows HMRC to collect additional payment where a self employed person or a worker provides their services through an intermediary (for example a personal service company or a managed service company) but that individual is in fact an employee in all but name, and would be an employee if the intermediary wasn’t there.
IR35 aims to ensure that everyone who should be classed as an employee for tax purposes, pays the PAYE and National Insurance as an employee would. If IR35 applies, tax and National Insurance must be deducted from fees and paid to HMRC.
A failure to comply with IR35 can result in not only the due tax being backdated, but also potential fines being imposed on the liable party. Up to now, except where the individual works for the public sector, the intermediary was the responsible party for deciding on employment status for each contract and was the party who would be liable for those fees or taxation.
What changes?
From April 2020, the changes to IR35 mean that the responsibility for judging employee status will shift. At the moment, it is for the intermediary (which can be the individual contractor themselves where there is a personal service company) to judge whether they are “falsely self-employed” or not, but from April this responsibility will transfer to the client (so the company who is instructing the intermediary).
This change does not apply to small companies, as defined by the Companies Act 2006.
What should a company do?
The simplest solution is to very carefully review and analyse the real status of each of the individuals who you instruct through an intermediary, and judge whether that individual is, in fact, an employee in all but name (see “What should be considered” below).
Blanket determinations (e.g. just deciding that all such individual’s contracts fall within or outside of IR35) will not be sufficient to comply with HMRC’s requirement. It is required that companies must take reasonable care when assessing whether such arrangements fall within IR35.
If a company gets the determination wrong, but still takes reasonable care, then the liability remains the with intermediary. So all that is required on the part of a client company is to make a reasonable assessment of whether the contractor or worker they are instructing through an intermediary could reasonably be judged to be an employee.
Where the individual is, on reflection, an employee in all but name, it might be that the company could then decide to integrate that contractor into the organisation as an employee (assuming they agree) or whether to perhaps amend or terminate those arrangements with the individual to further secure the company’s position.
What should be considered?
We’ve listed numerous factors which HMRC might consider on our website and HMRC has a CEST tool which also considers what status an individual might have.
Here at Thrive, we can also offer an audit of your contractors and their arrangements, to advise you as to the possible risks and whether you might want to reconsider the method by which they’re engaged.
If you have any further questions about the contents of this blog, please do not hesitate to get in touch.
Written by Alicia Collinson
