IR35, off-payroll working rules, intermediaries legislation… it goes by all of these names, and for anyone working or hiring in the contractor space, it’s what everyone’s talking about.
IR35 is a set of rules first introduced by HMRC back in 2000 to tackle what they saw as the “disguised employment” of contractors providing their services through a limited company. Basically, it was designed to ensure that anyone working like an employee is taxed as an employee.
You could read up all day long on the background to IR35, what has changed in recent years and what is happening soon. Having said that, much of the information is either out of date, inaccurate, or you would need a law degree to understand it.
We also know busy people don’t have all day!So whether you are a contractor, agency, or hirer, if you never read anything else about IR35, here are 8 essential things you need to know.
IR35 only applies to workers operating through limited companies, often referred to as Personal Service Companies or PSCs.
PAYE employees, umbrella company workers and self-employed sole traders (including CIS workers) are not in scope of the IR35 legislation. So if that’s you, or if that’s how you are engaging your workers, move along, nothing to see here!
Whether a contract is “caught” or “not caught”by IR35 ultimately depends on whether a worker would be classed as an employee if they were not working through a limited company.
If a contract is “caught by” or “inside” IR35, the worker is deemed to be an employee and should be taxed as such.
If a contract is “not caught by” or “outside”IR35, then they are deemed to be in business in their own right and taxed accordingly.
So, what makes a contract inside or outside IR35? The answer is rather complex and has evolved out of years of case law.But it can be simmered down to 3 core tests of whether someone is working like an employee or not.
● Mutuality of obligation - is the client obliged to give work to the person and are they obliged to take it?
● Personal service - is the person required to personally do the work, or can they send a substitute? This must be able to happen in reality as well as contractually.
● Control - is it a master / servant relationship? Or is the person free to decide how to perform the work as they fit?
HMRC uses these 3 tests, as well as other factors such as financial risk, to establish whether the relationship between the worker and the hirer is one of employment, or a business to business transaction.
For a contract to be classified inside IR35, it must indicate an employed relationship in all 3 of the tests above.
This is where it gets interesting. Since the rules first came in, it was always down to the individual limited company director to determine the IR35 status of their contracts.
Rightly or wrongly, HMRC decided that only 10%were doing this correctly and the treasury was missing out on a huge chunk of unpaid tax as a result.
So, in 2017, they changed how the rules were applied for public sector roles, making the end client responsible for determining IR35 status. This change will be extended to the private sector from 6th April 2020.
Without going into the nitty-gritty of the legislation, from April this year, the off-payroll rules will be broadly the same across the board. (Read an overview of the draft legislation here)
Clients will have to pass a “Status Determination Statement” down the supply chain to the party paying the limited company.
CEST stands for Check Employment Status for Tax and is HMRC’s tool to assist workers, clients and other stakeholders assess the IR35 status of a contract.
It uses a series of questions and at the end gives a determination of whether IR35 applies or not.
HMRC have said that use of CEST is not compulsory but it is also the only IR35 decision-making tool they will standby, although other independent tools are available.
Under the new rules it is the responsibility of the “fee-payer”, the party paying the limited company, to ensure appropriate tax and NICs are deducted and paid to HMRC.
However, if they fail to do so, and HMRC can’t recover the debt from them, liability can be passed up the supply chain.
A watertight supply chain is more important than ever for all parties!
There’s been much lobbying against the changes to IR35, and with the snap general election, Brexit looming and no Budget happening until March, there has been a lot of talk that the changes will be delayed or pulled.
Chancellor Sajid Javid did make a pre-election promise to review the reforms, and has delivered this on the face of it, with are view announced early in the New Year. But this gave no indication that the changes will be delayed, or even altered. Instead the review will focus on the implementation of the rules.
With less than 3 months to go before the forms are in force, contractors operating through limited companies, and those engaging them need to act now.
If you are a worker supplying your services through a limited company, have you assessed the IR35 status of your contract?Do you know your clients’ stance on IR35?
You need to be well-informed about your own contract and working practices, in case you need to contest an IR35 decision you don’t agree with.
Hirers need to ensure they can accurately determine the IR35 status of their contractors and ensure their supply chain is equipped to pay all types of contract compliantly. Recruitment agencies need to be able to deliver on that to protect their own liability, while collaborating with their clients and communicating with their contractors.
The off-payroll IR35 changes ahead are big, but they can be effectively managed providing all parties take the appropriate steps to prepare.
Thanks for reading!
Contact Liquid Friday - IR35 specialist contracting
Call 02392 883300
The Covid-19 pandemic is affecting the way we all work.While many of us are self-isolating or working from home The Institute of Leadership & Management would like to help you use your time wisely and provide critical business support.Read more
The current coronavirus pandemic is affecting everyone, across every profession and sector. With government recommendations changing on a daily basis it has been incredibly hard for businesses to grasp best practice let alone reassure their employees.Read more
The challenges that COVID-19 has already presented have meant that businesses across all industries have had to change the way they work to protect their workforce and customers. Playing a crucial role in overcoming these challenges are HR professionals, from managing staff well-being to remote resources and communications.Read more