Career Advice, Recruitment
If you are a business that regularly hires contractors, or a contractor working for companies in the private sector then you might have heard about the upcoming changes to the IR35 regulation.
There's been a lot of news on this, and IR35 is a complicated piece of legislation for many contractors and businesses, with the government even being criticised on its clarity over IR35 and a recent blunder of leaking its IR35 off-payroll guidance in an online publishing error.
But stick with me! In this article, we'll help you get past the panic and noise and hopefully answer your questions about the changes to IR35 and what you need to know. From when the changes come into play, who's responsible for what, how to determine status and where you can get further information and advice.
Still with me?... ok let's go.
What is IR35?
First introduced back in 2000, IR35 is a law designed to increase the collection of income tax from people who work through an 'intermediary' such as an umbrella or personal services company.
The latest IR35 changes are important to consider if you're a contractor or a business involved in limited company contractor recruitment.
Okay, so what's changing?
In a nutshell, the new IR35 changes will be implemented in April 2020 for private sector contractors, transferring the responsibility of assessing IR35 from contractors to large and medium companies. This will apply to all payments made on or after the 6th of April 2020.
Private sector businesses will be responsible for determining the IR35 employment status of all their off-payroll workers. (Contractors working in the public sector are currently responsible for making this decision.)
Whilst the fee-payer (usually a recruitment agency) will be responsible for deducting the relevant tax and National Insurance contributions at source.
Financial implications for IR35 are particularly significant for workers as it could reduce total net income by up to 25%.
Right, so how is contractor employment status determined?
Companies are responsible for creating a 'Status Determination Statement' that states if a contractor's role is 'inside' or 'outside' IR35.
Inside IR35 status: If there is no intermediary (an umbrella, limited or personal services company) and if the contractor looks like they work for the hiring company as an employee (work is supervised and working hours are determined by the client), it is likely that they will be considered an employee for tax purposes. And the hiring company will pay employee rates of income tax and national insurance.
Outside IR35 status: If the individual works through an intermediary and does not work in a way that makes them look like an employee of the hiring company. (They do the work they are contracted for, the work is unsupervised with no further expectation of work.) Then they are then deemed self-employed for tax purposes and are responsible to pay self-employee rates of income tax.
So, what is my responsibility as a hiring business?
As the hiring organisation, it is important that you provide the 'Status Determination Statement' which states whether you believe IR35 applies to the contractor and the recruitment agency and the reasoning behind it.
Until this statement is provided you will be classed as the fee payer, making you IR35 liable and responsible for deducting the appropriate tax and NIC's from the contractor before paying this to HMRC.
How can I determine if IR35 applies to my business?
- Use the HMRC CEST tool - https://www.tax.service.gov.uk/check-employment-status-for-tax/disclaimer
- If the contractor is inside IR35 and the hiring business takes reasonable care in making this assessment, then the client is not liable for any relevant taxes.
These rules will not apply to small companies that meet two or more of the following conditions:
- No more than 50 employees
- Turnover no more than £10.2 million
- A balance sheet total of no more than £5.1 million
This change in legislation can come across as complicated to all parties involved, with 6 in 10 contractors stressed or worried about IR35. f you're confused by lack of clarity over what constitutes IR35 status you can use the HMRC CEST tool and ask yourself the following questions to see if you are inside or outside of IR35 regulations;
- Control – Does the client have the right to move you from the task they originally agreed to do? Does the client have the right to decide on how the work is done? Does the client decide your working hours?
If yes, you are inside IR35 as you are working as a contract worker but look as if you work for the client as an employee.
- Substitution – can you send someone in to replace you and do your role? Will the client accept this substitution? Who will pay the substitute?
If you can be substituted, you are outside IR35. In this case, the client will be liable to pay you, and you will pay your substitute. If no - you are inside IR35.
- Mutuality of Obligation – Do you have to complete work when asked to do so and do you have an expectation of a constant supply of work?
If yes, you are inside IR35. A self-employed individual who is outside IR35 will do the work he is being contracted to do and will finish with no expectation of further work.
- Financial Risk – Do you have to buy equipment or materials? Do you have to fund any other costs? If the client wasn't happy with work would you have to put it right and accept the cost of putting it right?
If yes, you are outside IR35 and classed as a self-employed individual. HMRC will look at the risk being taken by the contractor as it is not usual for an individual to be classed as self-employed if he takes a financial risk.
What happens if the contractor or fee-payer disagrees with an IR35 decision?
If any party, the contractor or fee-payer oppose the IR35 decision, the client has 45 days to respond and must provide reasoning for the decision made. If the end client fails to do this, the IR35 liability will transfer to them and they will then become the fee-payer.
What is the responsibility of the Recruitment Agency?
Once we receive the 'Status Determination Statement' from the client we are required to pass this along to the fee-payer, or in the case, we are the fee payer we will deduct the appropriate tax and NICs from the contractor's fee before making the payment.
Part of our responsibility as the recruitment agency includes paying the relevant Employer's NI, Apprenticeship Levy, and Pension to HMRC.
How do companies prepare for the IR35 reform?
- Start by taking a look at your current workforce and identify individuals who are supplying their services through personal service companies, what are their roles?
- Talk to your contractors to see if the off-payroll rules apply to their role.
- Review payroll processes and how these could be applied for workers inside IR35.
How do contractors prepare for the IR35 reform?
- HMRC CEST tool to check your employment status
- If you think you may be affected, you should seek a Status Determination Statement from your hiring company.
Disclaimer: This article is not intended to be relied upon beyond general education for contractors and businesses to improve their understanding of IR35 legislation. We advise to seek professional expertise when assessing contracts or dealing with HRMC enquiries.
Sources to find out more about IR35
Off-payroll working – (IR35) https://www.gov.uk/topic/business-tax/ir35
Preparing for the off-payroll rules (IR35 Reform) https://www.qdoscontractor.com/docs/default-source/resources/white-paper_-preparing-for-ir35-reform-july-2019.pdf?sfvrsn=6
Guidance for Contractors - https://www.taylorhopkinson.com/ir35/#proposed-changes
Prepare for changes to the off-payroll working rules - https://www.gov.uk/guidance/prepare-for-changes-to-the-off-payroll-working-rules-ir35