What is IR35:
IR35 refers to the tax legislation by HMRC which comes in effect when a company uses a supplier through an intermediary i.e. a limited company, in an attempt to pay less tax when they could be hired directly by the employer. “These workers are known as ‘disguised employers’ by HMRC.” The IR35 was designed to prevent tax avoidance concerning both the employer and the employee, who will now have to pay Income tax and National Insurance contributions. (Accountancy Age, Everything you need to know about IR35).
What is happening now:
While it was originally introduced in April 2000, it was received badly, and businesses felt they were dealt an unnecessary hardship. The UK government then replaced this 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.” (Contractor Calculator, What Is IR35)
According to Gov.UK
"If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.”
Therefore, the extensions to the IR35 include no longer having the right to set one's own IR35 status. Tighter guidelines define that the liability lies with the end-point entity, as described in the original contract. (Contractor UK)
How high are the stakes if you get it wrong?
“Three prominent BBC presenters have been landed with a tax bill of £920,000 after HMRC ruled last month that they are not legitimately self-employed. Their assignments were deemed to be caught within IR35 and they therefore had to pay a higher rate of tax, while unpaid national insurance contributions also had to be settled.” (Rec UK, IR35: We need to get ready)
What should you do as an Employer?
HR Director suggests that the first step is to assess which contractors apply to the new rules, with this useful tool provided by the government: Check Employment Status for Tax (CEST).
However, it also mentions that there may be some blurred lines; consequently, employers have further considerations to make such as:
1. The amount of control over the employers’ contract. High involvement in how the job is carried out suggests they should be treated as an employer and therefore, inside IR35. For example, they will be affected by IR35 if an employer own their rights to:
• Work patterns - would you accept that a worker could decide the location or hours they work in on their own terms? If this decision lies with you, they are likely to be inside IR35.
• Substitution (also referred to as Mutuality of Obligation) - if the original worker was unavailable and they offered someone else the work who was just as skilled as them, would that be okay? If not, they will tend to be seen inside IR35.
2. The cost worth to your business- if contractors were recognised as employees and this is too costly, it may be more economical to let the contractors go before the IR35 deadline.
3. Responsibility for application to each contractor, ensuring that self-employed people are not affected.- ignorantly blanket defining contractors/employees would incur costs to the business.
4. A clear recruitment process to be designed that determines whether contracts are for self-employed or temporary employees at the beginning of their contract- this proves an effort made to eliminate tax avoidance from their initial days.
For more information on the steps to take for and post IR35, read 'How to Keep it 'Business as Usual' Post IR35'
What can you do as a Contractor?
As mentioned above, from April 2020 you will not be able to define whether you are inside IR35 or not, and so, you will want to ensure that your client treats this time fairly and does not wrongly consider you as an employee.
Contractor UK recognises that the CEST tool has been provided by HMRC to define this for the client; however, it does not include such clauses that could mean you are exempt. It is imperative then that you take further action, even if liability does not lie with you. Instead, first steps for a contractor should include taking the HMRC IR35 Test to assess the work you do.
Contractors can avoid being wrongly defined inside IR35 if they intervene with the decision. Many clients are not clarified on who or how to set IR35 and so deciding together is a mature place to begin. Make sure you find out what your client is planning, even if they haven’t reached out to you. Contractor UK suggests coming together to form a Contract of Agreement:
“a CoA effectively confirms that all parties in the supply chain (including the recruitment agency), are in full agreement of a contractor’s IR35 status.” (Contractor UK, How Contractors Can Prepare for 2020 Private Sector IR35 Reform)
So how will you prove that you are not under employment status?
Insurance company AXA highlights that “IR35 won’t apply if the contract is for the services you provide instead of employment”. Additionally, one must consider the following:
- Mutuality of Obligation. As a contractor, you are not obliged to keep working for the company, and the company is not obliged to offer you paid work after the agreed project has completed.
- Substitution. To fall outside IR35, the contract should state that other individuals can fill in for the work that you produce. For example, if you took leave, another colleague can cover.
- Supervision, Direction and Control. As mentioned earlier, dependency can also be on how much control the company has over the work you provide such as, working patterns or even dress code (outside of health and safety requirements). If these decisions lie with the company, this usually indicates employee status.
- Payment guidelines. As a contractor, payment tends to be on a project basis rather than a salary. You are likely to have your own terms in agreement with the company rather than the other way around.
- Proof of own business. In favour of the contractor, evidently owning your own business with the assets to demonstrate this, for example; your own staff, office space, and equipment.
What affect will ‘inside IR35’ have?
With these considerations in mind, if contractors are given an employee status, company and contractor will have to make changes.
The Client/Company hiring the employee will:
• Add the contractor to the Payroll and PAYE, the same as other traditional employees
• Pay the contractor a salary rather than project-based income
• Contribute to their pension.
The employee (previously a contractor) will:
• Control over how they work handed over to the company including the obligation to work themselves, and not being able to substitute if they were to get ill etc.
• Receive benefits from the client as if they were an employee in the same office such as holiday pay, wellbeing benefits.
• Pay National Insurance Contributions and Income Tax and therefore have less to take home but consequently contributing to Pension schemes alongside their now employer.
It goes without saying that both employers and contractors need to work together to ensure fair selection. Don’t get left behind and caught up with extra fines.
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