Changes to IR35 legislation applying to the private sector will now take effect from April 2021
Is this something you need to plan for or not?
This legislation has been in the Public Sector for some time and was due to be introduced into the private sector this year but was delayed by Coronavirus. That might have been good news for some, but it is still coming our way so are you impacted by it?
This article should help you decide.
What is IR35?
IR35 is tax legislation, aimed at identifying individuals (or Companies via Employers NI) who are avoiding paying the tax that they should be. It specifically challenges people who supply their services to clients via their own company, often known as a ‘personal service company’ or via an ‘umbrella company’. This could be a limited company or a limited liability partnership, who, in HMRC eye’s, is being used as a hiding place. HMRC uses the term ‘disguised employees’.
These ‘disguised employees’ are often more commonly termed ‘contractors’. They are not all in disguise – some are completely legitimate, but it is important to understand where the boundaries fall for both ‘contractor’ and ‘Company’.
Why the change?
HMRC is looking to claw back £3 billion in taxes that it believes should come from ‘disguised employment’, with Government estimating that only one in 10 private sector contractors are paying the right level of tax.
Anyone who has worked in the Corporate Sector for long enough may remember a time when you could be made redundant and turn up at work the next day as a ‘contractor’ … often doing the same job but for more money. It was a way of reducing headcount, saving cost by not having to pay employers NI and avoiding many other things typical of an employer/employee relationship e.g. instant dismissal without consequences, attending performance appraisals.
It is not quite like this nowadays but many companies still ‘try it on’ and so do some individuals, because it suits them, but come April 2021, things will be different.
What does this mean for Businesses?
The changes mean that businesses – rather than individuals – will now be responsible for deciding whether contractors should be paying tax and National Insurance at the same level as employees, or whether they are genuinely self-employed for tax purposes.
The business must decide if it deems whether a ‘contractor’ will fall either ‘inside IR35’ or ‘outside IR35’ and it can ask many questions to determine which. Many large organisations are moving away from using Contractors working through their own limited companies but by this, I mean individuals who typically go to the same company most days and rely on the majority of their income from that same company. e.g. an IT contractor working on a large project for one company for 6 months or more. This is (or was) very typical in the banking or finance sectors.
Operating ‘inside IR35’ means operating like a permanent, salaried employee. Somebody who is paid via a payroll at regular intervals (usually monthly) and receives a payslip that shows deductions for appropriate levels of tax and National Insurance.
Operating ‘outside IR35’ means the individual is genuinely in business in their own right as a limited company or genuinely ‘self-employed’. This will be demonstrated by the number of other businesses, that the individual engages with and receives payment from. We go into more detail below.
Where does this legislation apply?
The legislation applies in England, Wales, Scotland and Northern Ireland. It doesn’t apply in the Republic of Ireland.
Who is exempt?
These reforms do not apply to ‘small’ businesses, using the official definition of ‘small’ in the Companies Act 2006. To be exempt you must satisfy two or more of the following requirements during the tax year in question:
- An annual turnover not exceeding £10.2 million
- A balance sheet total not more than £5.1 million
- No more than 50 employees.
Proving your status – employee or not?
Regardless of whether these new reforms impact you, it is still very important to understand employment status. Even if you are exempt from this new legislation, there are still consequences if you do not correctly identify employment status so here is a little checklist for you.
Decisions in tax tribunals look at how someone works on a day-to-day basis ‘in practice’. This also applies to Employment Tribunals when deciding if the employee has genuine protection for things such as unfair dismissal.
An individual is usually genuinely self-employed or ‘outside IR35’ if:
- They work for multiple clients – an individual is more likely to be deemed outside IR35 if the client is exerting less control and they can refuse work. Working for the same company over a long period of time, over the same pattern, is likely to flag up an employment-like relationship
- They can demonstrate that they have control/autonomy over when and how you work – If the individual uses company equipment on company premises, work set hours and/or are told exactly what to do, they are likely to fall inside IR35. More autonomy on the part of the individual could sit them outside IR35
- They have the ability to provide an alternative worker – If they can send a substitute to do the work, that is likely to indicate they sit outside IR35. If it has to be a specific person, it’s more likely to be inside but in certain circumstances, control over how the subsidy is used is justifiable, especially if a professional service is being provided like HR support for example.
- They can decline work or have agreed with arrangements that don’t resemble regular employment. This is known as a ‘mutuality of obligation’. If an individual is not obliged to do the work and the company is not obliged to provide them with work, they are likely to fall ‘outside IR35’. i.e. there is not ‘contract of employment’ but possibly a ‘contract for services’ or a ‘letter of engagement’.
- They are paid intermittently or irregularly g. they generate their own invoices when a job has been completed or it is priced on a project basis. Individuals can charge hourly fees or ‘retained fees’ as long as that is not the only source of income for that individual. The more financial risk there is in a pricing structure or fee model, the more likely they are to sit ‘outside IR35’.
What if your contractor insists, they fall outside IR35?
If the individual or the client insists, they fall outside IR35, you must be satisfied that they do, and you would be wise to take a cautionary approach. You can decide if the individual should become a permanent employee or cease working for you. The individual can challenge the decision you make but as the liability rests with the company, they really have to make their own decision to stay or go.
If an individual does challenge it (and perhaps feels hard done by), they are entitled to written reasons from the business and a review of the decision. They can also ask HMRC to recalculate their tax liability. This is risky if they have not been utilised as on a genuinely self-employed basis and the individual could argue employment rights or HMRC could look for revenue from perceived unpaid employers NI contributions. You don’t want to be in this situation, so if you are worried about whether you are affected by this, feel free to call us.
If an individual works through an agency, the liability for deciding who falls inside or outside IR35 still falls to the client, but your agency will be responsible for deducting the right level of tax and National Insurance.
To check your status visit:
If you would like to know anything more about determining employment status or the impact of IR35 on your business, we are always here to help.