Introduction to IR35
IR35 is a word used to describe two sets of tax legislation that were designed to combat tax avoidance by workers who were supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.
IR35 has been heavily criticised which is why the government is replacing the original IR35 legislation with the new Off-Payroll Tax which was initially introduced into the public sector in April 2017 and will be extended to the private sector from April 2020. Confusingly it is also referred to as IR35….
Genuine contractors, freelancers and consultants, in business on their own account, will have nothing to fear from IR35.
The new regime
So, from 6 April 2020, there are new rules:
• that require organisations,
• which engage workers via a personal service company (a limited company that typically has a sole director, the contractor, who owns most or all of the shares)
• to undertake checks to determine whether that worker should be treated as an employee or as self-employed for tax purposes, and
• account for income tax and national insurance if sufficient characteristics of employment exist.
In a nutshell, the changes coming in move the responsibility for determining whether contractors should be taxed as employees or self-employed on to the end user of the services (the client), rather than on the contractor.
They also impose the obligation to operate PAYE and NIC on the client rather than leaving it to the discretion of the contractor.
How it will work
The key amendments to the IR35 legislation are as follows:
• A client who engages self-employed contractors through personal service companies will now be required to carry out an IR35 assessment before a contract begins.
• The client must then issue an IR35 status determination statement which is a comprehensive statement which declares the following:
o The contractor’s deemed employment status
o The reasons behind the conclusion reached on the employment status
• From 6 April 2020 a status determination statement is to be completed for each new personal service company engagement and for each existing such engagement due to receive a payment after this date.
• It is important to note that the requirement to issue a status determination statement for each contractor only impacts where the client engaging the contractor is a medium or large business – if two of the following are met:
o generate more than £10.2 million revenue per year;
o have more than £5.1 million of assets; and/or
o have more than 50 employees.
• Clients who are small businesses will not be required to issue determinations (at least not yet).
• If employment status is determined it is then down to whoever pays the consultant’s fees to deduct income tax and national insurance contributions from payments made to them. It will therefore not matter whether the individual is invoicing a company personally or through a personal service company – if sufficient characteristics of employment exist then the end user, the client, will have to account for income tax and national insurance.
• If an individual disagrees with the determination of their status, the client will have 45 days to review the decision under a “status disagreement process”. The client will either have to change the individual’s status or provide them with confirmation of their original decision and reasons why they came to this conclusion.
The new IR35 rules will therefore significantly increase the risk involved in mislabelling workers and employees as self-employed. This is particularly the case where the mislabelling has occurred for several years and there will be back taxes, interest, penalties, costs and expenses to be settled with HMRC.
How should businesses prepare?
For the best possible chance of avoiding liability under IR35, companies should now be considering how their business is structured and how they currently engage with contractors. This should include:
• Reviewing existing contracts – contracts can be drafted to mitigate the risk of IR35 applying. Similarly, a poorly drafted contract can substantially increase your risk.
• For identified contractors falling within IR35, considering whether the extra costs are commercially necessary, or whether their current contracts should be amended or terminated.
• Estimating any likely cost increase due to the employer’s national insurance contributions and potential changes in the contractor’s rates.
• Reviewing systems and processes around your businesses engagement of contractors.
• Providing training for employees who are responsible for determining the status of contractors engaged by your business.
How can GoodHR help?
• Provide advice to help determine the employment status of a worker
• Provide advice on how to produce a status determination statement
• Help to review your existing engagements to decide whether the new rules are likely to apply to them
• Draft new contracts to take in to account the new rules
• Advise on (and implement strategies to) mitigate IR35 risk arising out of contractor engagements.
Call us on +44(0)7917878384 or email firstname.lastname@example.org for expert advice and assistance.