IR35 is a piece of anti-tax avoidance legislation being rolled out to the private sector in April 2020, but what does that mean to your business?
Firstly, it is important to remember that these changes will only affect ‘medium’ to ‘large’ businesses. That means that you must satisfy at least two of the following. Your organisation has:-
- an annual turn over of more than £10.2m;
- an asset balance sheet of more than £5.1m; and/or
- more than 50 employees.
There are many permutations of how labour may be procured in the supply chain. But, for the purposes of this article, let’s imagine two examples:-
Your organisation, AZ Contractors, is the main contractor on a project and meets the criteria of a medium or large business (set out above). As part of the project you need labour only for the dry lining works so you contact a number of your contacts, including John Smith. You do not want to take John on as an employee or worker so you agree with John that he will come and do the work as self-employed.
Under this example, there is no triggering of IR35 but the usual questions of employment status will still need to be looked at.
The same facts of Example 1 apply but this time John agrees to work as self employed through his limited company, John Smith Limited.
John Smith Limited is an ‘intermediary’ between your business and John and would trigger the requirements of IR35.
So what are the changes?
Following on from Example 2, the current rules place the burden on John Smith Limited to determine the relationship between John and AZ Contractors. It is obviously in John’s interest if John Smith Limited confirms that he is self-employed (as opposed to an employee). This means that the payments from AZ Contractors to John Smith Limited do not need to have PAYE tax and National Insurance contributions (NIC) deducted, which is in John’s financial interests.
Under the new rules, which will apply from April 2020, the burden will shift from John Smith Limited to AZ Contractors to assess the relationship (known as a Status Determination). Where John is found to be a ‘disguised employee’, AZ Contractors must ensure that PAYE and NIC are deductible when paying John Smith Limited going forward.
If your organisation fails to conduct a Status Determination or get it wrong then HMRC can hit you with penalties which could include reviewing previous payments and requiring you to pay PAYE tax and NIC going back 20 years!
What should we be doing?
If you think your organisation may be caught by IR35, you need to start acting now. To assist you, we have set out some recommendations, below.
- Review your self-employed contractors and carry out a Status Determination (either utilising the Government’s Check Employment Status Test (CEST), through your own HR team or with outside help) to decide the individual’s status. Once you have the outcome, provide this to the intermediary (John Smith Limited, in Example 2), explaining the reasons behind the decision. You will also need to consider an appeal process for John/ John Smith Limited to appeal the decision. We consider that this would be similar to a disciplinary appeal process.
- Consider the different ways that you could interact with your self-employed contractors after the IR35 changes. This may include but is not limited to:-
- changing the way your organisation engages with the self-employed contractor, for example, would making a few changes to ensure that the contractor is found to be genuinely self-employed and be a win-win for both parties;
- if it fits with your requirements, consider bringing the self-employed contractors on as employees/workers;
- (where the self-employed contractor is found to be an ‘employee’) re-negotiating the relationship between your organisation and the intermediary to include scope for additional financial liabilities to HMRC; and/or
- having a relationship through an agency or umbrella company. This means that the employment of the self-employed contractor sits with that umbrella company, as the “employer” rather than your organisation.
This article first appeared in the March edition of Construction UK Magazine https://issuu.com/lapthornmedia/docs/cm320/10