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What has changed with the IR35 rules?

The off-payroll working rules, also known as IR35, ensure workers are classified correctly as employed or self-employed and pay the correct amount of income tax and National Insurance contributions (NICs).

Since IR35 legislation was introduced in April 2000, responsibility lay with a Personal Service Company or ‘PSC’; a limited company set up to provide the services of a single contractor who is usually the sole shareholder and company director of the business.

From 06 April 2020, this responsibility will shift from the PSC to you, the employer.

Will your business be affected by the 2020 IR35 changes?

If you are a large or medium-sized private company using off-payroll workers, the changes will apply to you.

Essentially, you will be responsible for coming up with a documented process (including looking at all of the factors indicating employment status), which is acceptable to HMRC, for any of your workers operating through a personal services company (PSC) or intermediary. This will need to formally assess whether an individual worker would be an employee of your company had they been directly engaged by you.

IR35 legislation was introduced to tackle a form of perceived tax avoidance whereby individuals may seek to avoid paying employee income tax and National Insurance Contributions (NICs) by supplying their services through an intermediary and paying themselves in dividends.

If IR35 applies, the sums received by the intermediary are, in effect, treated as employment payments by the intermediary to the worker for tax and NIC purposes and you will, therefore, be responsible for making these deductions and also paying employer NICs in respect of these payments.

Who is exempt from the new IR35 rules?

If you use workers through an umbrella company, an employment agency or already pay PAYE tax and Class 1 NICs on their earnings, you do not need to make any changes to comply with IR35 legislation.

Small businesses also fall outside the new rules. You are classed as a ‘small business’ if two or more of the following conditions apply to you: an annual turnover of not more than £10.2m, a balance sheet totalling £5.1m or less, or have 50 or fewer employees.

When is a worker ‘employed’?

When establishing employment status, you should consider factors such as:

  • what right of control, supervision and direction you have over your worker;
  • where is the work carried out;
  • how easily your worker can be substituted and how personal their services are;
  • who bears the financial risk;
  • who supplies equipment and material used by your worker;
  • whether your worker receives benefits;
  • whether you have a right to terminate the contract with a notice period; and
  • obligations that you and your worker have.

However, you must look at each case on its own individual facts and circumstances.

The impact of IR35 legislation changes on your business

Businesses using high numbers of contractors will need to consider how their dispute resolution process will operate to be able to deal with any bite back.

If your classification of ‘employed’ status is at odds with the historical approach taken by your PSC, this may prompt challenges from disgruntled contractors who may also be concerned that this change in status will alert HMRC about their previous ‘non-compliance’.

It may also be beneficial to identify which of your supply contracts and the number of parties in your supply chain might be affected, so you can calculate the likely financial impact that changes to ‘employed’ status will have on your business as a whole in the form of a possible hike in costs passed onto you as a client or customer.

You may need to make changes to your master contracts to help you identify PSCs and other intermediaries.

Taking on contractors as employees

Some companies are deciding to formally take on contractors as employees, with the associated benefits that employed status infers and removing PSC arrangements altogether.

Others are categorising workers as employees solely for tax purposes, which can have a knock-on effect for companies in the form of contractors seeking to claw back the financial hit by increasing their rates or even demanding full employment rights such as the minimum wage, holiday and sick pay, and access to your pension scheme, to bring them in line with their counterparts in other businesses.

In both cases, you will be faced with taking on the financial implications of employer NICs as a minimum requirement. These contractors might also try to bring a case for back pay, claiming that they should have been categorised as employees from day one.

Talk to your accountant about IR35 legislation

Given that this is primarily a tax matter with tax implications,we advise that you discuss your specific situation and implications with your accountant as soon as possible.

A government review is due to conclude mid-February and will highlight any further steps that are needed to ensure that the changes are smoothly implemented from the April 2020 go-live date. We will update you on this review as soon as possible.

Key takeaways

The as-yet-untested implications of the changes are potentially wide-ranging, there is plenty of scope for workers to become disgruntled and tensions to arise between you and your contractors, given that ‘employed’ status creates a financial burden for both parties.

As well as working closely with your accountant, you should implement a robust documented process as a priority, if you have not done so already.

In our opinion, the best strategy is transparency: speak to potentially-affected parties early on and set out a plan for dealing with related disputes that may arise as a result of the new legislation.

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