IR35 2020 - are you ready?
You may or may not have heard about the upcoming changes to the IR35 legislation - if you are a UK company using contractors, however, it is something that you will need to consider very soon!
What is IR35?
To put it simply, IR35 is a piece of UK tax legislation, introduced in 2000, that covers the relationship between organisations and individuals who contract with them, through limited companies or umbrella companies. It was introduced as it was felt by government that in many instances, contractors were using the cover of limited / umbrella companies to avoid employment taxes, notably NIC, as contractors would generally take payment from their limited companies in the form of dividends instead of salaries. The legislation was designed to determine whether a contractor was “outside IR35” (a bona fide contractor / company providing services) or “inside IR35” (where the contractor / company is disguising an employment relationship in order to avoid employment taxes).
For a number of years, the government has concluded that contractors (and indeed employers) are continuing to abuse the IR35 regulations, to the extent that it estimates that only 1 in 10 contractors would fall “oustide IR35” according to the tests that have been set to ascertain a contractor’s status.
What are the IR35 tests?
The following are the tests that can be applied by HMRC to determine whether a contractor will fall inside IR35 or outside IR35:
- Control and Direction Does the employer control and direct the manner in which a contractor completes a project, or does the contractor have autonomy with regards to undertaking the project? Indicators for “control and direction will include whether the contractor has a line manager, whether they have set hours of work, or specifying that the work must be performed at an employer location
- Personal Service / Substitution The right to provide a substitute in a contractual agreement has long been deemed to be an important factor when demonstrating that a contract assignment falls outside the scope of IR35. An employee provides his/her personal services to an employer (client), whereas a business would provide its services to a client, rather than the exclusive services of an individual. Consequently, contractors should be able to demonstrate that their company can provide an adequate substitute should they not be able to individually provide the contracted services.
- Provision of equipment Does the employer provide equipment for the contractor to provide services. or does the contractor use their own?
- Exclusive Service Does the contractor provide their services exclusively to one customer at any point in time, or do they provide services to multiple customers?
- Part and Parcel Is the contractor integrated in the organisation? Do they have access to staff facilities and benefits? Do they have line management responsibilities? Do they attend social events or staff meetings?
- Basis of Payment HMRC contends that in many instances, paying a contractor by an hourly or daily rate indicates an employment relationship, and that in most commercial relationships, payment is received upon completion of services.
- Contractor business set up Is the contractor’s business a bona fide commercial enterprise? Do they have a website / company email / letterhead / logo? Do they have their own equipment? Do they work with multiple customers? Are they VAT registered, or registered with the Information Commissioners Office (for data protection purposes? Does the company advertise? Do they have dedicated office space?
If a contractor is audited by HMRC and does not meet all of above, HMRC may rule that they are operating inside IR35 and that an employment relationship exists.
What are the IR35 changes taking place in 2020?
Since 2017, public sector organisations have been responsible for administering IR35. As a part of this reform, the liability for paying the tax also transferred from the contractor to the fee-payer, which may be the end employer, or recruitment agency if the contractor has been engaged in this way.
As of 6 April 2020, these rules will be rolled out in the private sector, with medium and large businesses placed in charge of setting the IR35 status of contractors.
When working with a company that HMRC considers ‘small’ in the private sector from April 2020, contractors will remain responsible for setting their IR35 status and all of their taxes.
HMRC defines a small company as one which does not exceed two or more of the following criteria; an annual turnover above £10.2 million, a balance sheet total over £5.1 million, or more than 50 employees.
Should you decide that one of your contractors is inside IR35, you must make provisions for the deduction of PAYE and NIC (this may involve working with your recruitment agency partner).
What should I do now?
You should undertake the following steps to prepare:
Identifying individuals in your workforce (including those engaged through agencies and other intermediaries) who are supplying their services through personal service companies;
Using HMRC’s “Check Employment Status for Tax” service to identify whether the IR35 rules are likely to apply to any contracts that already extend beyond April 2020.
Speaking to your contractors about whether the off-payroll rules apply to their role.
- Putting in place processes to determine if the off-payroll rules apply to future engagements and how payments will be made to contractors within the off-payroll rules.
If you would like further information, please feel to contact us at firstname.lastname@example.org or 01236 608383 - we’ll provide you with guidance as to how to prepare for the upcoming changes.