IR35 is changing.February 24, 2020 11:02 am
What is IR35?
IR35 legislation was introduced by HMRC in 2000 with the purpose of collecting employment tax from those working through an intermediary (e.g. a personal service company or a worker’s own limited company). HMRC was concerned about “disguised employment”, where individuals could avoid paying PAYE income tax and national insurance contributions by supplying their services through their own company, when their role and how it was carried out would be the same as that of an employee. HMRC needed to determine whether a worker was essentially an employee (Inside IR35) or a genuine self-employed contractor (Outside IR35).
What is changing?
Initially the responsibility and liability of making this “in” or “out” decision, or employment status decision, fell to the individual contractor. However, HMRC estimated that only 10% of those contractors applied the rules correctly. They therefore tweaked this part of the legislation in the public sector in April 2017, making the end user client responsible for the decision, along with any liability for unpaid taxes where an “Outside IR35” decision was made incorrectly. It appeared this move would potentially catch more contractors inside and boost treasury funds through the increased taxes.
From 6th April 2020 the same amendment to the legislation will apply to the private sector, unless the end client is classed as a small company (as per government guidelines), in which case the determination remains with the contractor.
What if the contractor is found to be Inside IR35?
If a determination finds the contractor to be inside IR35 for a specific assignment, then any payments must be subject to PAYE and the contractor must pay the correct amount of tax and national insurance (NI) that an employee would have paid. The fee-payer or employer must also pay employers national insurance.
Where a contractor has claimed to be outside IR35, but on HMRC investigation they are found to be inside, they may face a penalty charge to cover the unpaid tax and NI.
From April 2020 any contractors found inside IR35 would require a deduction at source of tax and NI by the fee-payer in the supply chain and this could significantly reduce take home pay.
If the individual is deemed outside IR35 then this means they are operating correctly as a limited company and the contractor is responsible for all tax liabilities due. This is the attraction of working and being paid in such a way.
If you are paid through a limited company, it is worth double checking the employment status determination you have for your current assignment (you or your accountant should already be doing this anyway) to ensure you are prepared for any potential changes from April 2020.
Basic IR35 Assessment
In making an employment status determination there are four factors which can be used, assessing your treatment and behaviour within the organisation for which you are carrying out work. Please be aware that these factors are a basic guide. The status determination is not quite so simple and can involve detailed use of case law. The factors are:
Personal Service/Right to substitution: Can the contractor send a substitute with similar qualification and skills to complete the work instead of the contractor? If the answer to this question is “yes” then there isn’t a personal service provided to the client and therefore the worker isn’t a disguised employee.
Control: Does the end client control how the work is carried out, or when it is done? The greater this level of control, the more likely that the contractor is inside IR35 as they are being treated like an employee and not as an outsider providing specialist services.
Mutuality of Obligation (MOO): Once the current workload has been completed is the worker free to leave or is the client obliged to find them more work? It can also mean does the individual have to accept the work offered by the end client? If the answer to these questions are “no”, then a determination could lean towards being outside IR35.
Financial risk: To determine risk, the following questions would need to be asked: Does the worker provide anything for the engagement that is not reimbursed? Can they make a profit or loss? If the client is not satisfied with the work does the individual put it right at their own cost? If the answer to these questions is “yes” then this would stand as an indicator to being outside IR35
IR35 in Practice – Status Determination Statement (SDS)
From April 2020 the end client will be asked to produce a Status Determination Statement (SDS) and in producing the completed document must be seen to take “reasonable care”. HMRC guidelines are vague on what they mean by reasonable care. However, in simple terms, it means that the reasons for the decision of the engager must be fully considered and explained. This document will then be passed down the supply chain, to the fee-payer or agency and eventually reach the contractor. This will form the basis for the “in” or “out” decision which will be applied to the contractor’s payments.
Understand Where You Fit In
SCP has developed working relationships with many payroll providers and tax specialists. With their assistance we aim to support our clients and candidates through the new legislation changes. It is crucially important that anyone working and being paid through their own limited company understands and complies with the IR35 rules, and it is worth looking at your current situation to see if you fall inside or outside of the legislation. Likewise, if you are an end user this new legislation cannot be ignored, otherwise HMRC could target you for unpaid taxes for not exercising reasonable care. The consequences are huge so be cautious.