presenteeism

IR35 – What is it and why do I need to know about it?

Are you a contractor?

Update. In November 2018, the Chancellor confirmed that IR35 would be extended to the Private Sector from April 2020. The tax man has since taken an aggressive approach targeting nearly 1,500 contractors who have either previously or currently work with GlaxoSmithKline (GSK). In the letter, HMRC state that they may be breaching tax regulations and that workers should review their tax status to ensure they are paying the correct amount of tax. So what is IR35 and what do you need to know if you are currently contracting through your own company?

What is IR35?

IR35 was introduced to the Public Sector in April 2017 and was designed to prevent people who should be classed as employees avoiding the payment of PAYE by delivering their work via a Personal Service Company (PSC). The Gov.uk website describes it as such:

"A worker is involved in off-payroll working when they work for a client through their own intermediary, often a personal service company (PSC), but would be an employee if they were providing their services directly.

As off-payroll workers are paid through their own intermediary, they pay Income Tax and National Insurance contributions (NICs) in a different way to an employee.

The off-payroll working rules are in place to make sure that where an individual would’ve been an employee if they were providing their services directly, they pay broadly the same tax and NICs as an employee".

www.gov.uk

How will it impact me?

The regulations have impacted the treatment of workers and if IR35 is extended to the private sector then the financial cost to employers could be significant. 

As it is the employer who is responsible for determining the status of their workers, each employer will need to assess the level of risk to their own organisation. When it was introduced to the Public Sector, it resulted in many former contractors being converted into employees. This resulted in some contractors outright refusing to work for bodies who classed them as employees and still more demanded huge pay rises to go permanent. Clearly as all sectors would now be covered by the regulations (should the proposal go ahead), the contractor’s room for manouvre is somewhat limited but employers could still lose talent if they take a draconian line. Many bodies elected to take a blanket approach and assume all contractors were employees, mainly due to the short window between the draft legislation being released and the implementation date. 

What test should I apply?

The Government have provided an on-line tool (available here) to help you determine whether your contractor should be an employee. However, HMRC have been accused of not knowing their own rules and the tool itself seems to conflict with case law. PwC provided the following guidance which is a good rule of thumb when determining employment status:

Control. Is the employer providing direction or supervision of this individual? Are they being micro-managed, given tasks to perform, and are they subject to performance reviews?
 
Risk. Is it possible for the individual to make a profit or a loss, what is the financial risk?
 
Integration. Is this individual part of the organisation? Do they have a company email address, telephone number, are they able enter the organisation using a company pass and do they feature in the organisation’s structural chart?
 
Substitution. Can an individual genuinely substitute themselves without authorisation from your organisation? If they have substituted who did the organisation pay – the original PSC or the substitute? 
 
Provision of owning equipment. Can this individual supply their own equipment such as a laptop or phone, or do you provide it for them?
 
The more distance there is between the way you treat employees vs contractors, the more likely that the contractors will fall outside of IR35.

Small business exemption

The legislation applies only to ‘medium or large’ businesses. There’s an exemption for end-clients who are ‘small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:

  • Annual turnover is no more than £10.2 million
  • Balance sheet total is no more than £5.1 million
  • No more than 50 employees.

Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of a contract remains with the PSC and the changes do not apply.

The government has included clauses in the legislation to ensure medium or large businesses do not set-up arm’s length companies or subsidiaries to procure services from PSCs. The legislation will apply to the parent company based on the aggregate amount of turnover and the aggregate amount of the balance sheet total of the connected entities.

 

There’s no small business exemption for public sector organisations and the legislation will apply to all end-clients engaging PSC workers in the public sector.

What should I be thinking about now?

The April 2020 date will be here before we know it. If you are unsure about your position, get tax advice now. The alternative is to wait it out and see if the long arm of the HMRC reaches out to tap you on the shoulder…

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