The IR35 tax regulations are changing for private sector businesses in the UK, shifting the responsibility for status determination and payment of the correct taxes and NICs to the end-user. In this week’s blog, we explain what the reforms mean for businesses and how you can comply with the regulations while remaining attractive to contractors.
What is IR35?
IR35 was introduced in the year 2000 and is legislation that prevents workers and businesses benefiting from tax and NIC avoidance through “disguised employment.”
Disguised employment is when a contractor supplies their services through an intermediary (such as a Personal Services Company (PSC) or Limited Company) when in practice they are an employee. This is done to avoid tax and NIC - something IR35 hopes to combat.
Contracts falling inside of IR35 (i.e. the contractor is, in reality, a worker) must be paid following the deduction of tax and NIC, either through PAYE, an umbrella company or the PSC.
What are the upcoming changes to IR35 for businesses?
From April 2021, the responsibility of ensuring compliance with IR35 is changing. Medium and large-sized private sector end-users become liable for ensuring workers are correctly classified and paid.
A medium or large-sized end user is one that:
Has a turnover of more than £10.2 million;
Has a balance sheet of more than £5.1 million; or
Has more than 51 employees.
This means you must conduct an assessment of the contractor’s worker status and issue a Status Determination Statement (SDS) confirming the reasons behind your decision, alongside details of how to appeal.
If you determine a contract falls within IR35, you must ensure tax and NICs are deducted either by yourself or your employment agency. If you fail to classify a worker as falling within IR35 correctly, HMRC can claim unpaid taxes, penalties, and interests from your agency or, if unable to, you as the end-user.
How to determine IR35 status
Compliance with IR35 relies on correctly determining a contractor’s worker status. There is no defined test for assessing worker status, however, the following factors should inform your decision:
1. Financial risk
Businesses risk financial loss; therefore, a contractor who could make a loss (or a profit) is more likely to be considered as falling outside of IR35.
2. Employee behaviour
If a contractor acts as an employee, HMRC will likely consider them an employee, especially if they are on the holiday rota, take part in performance management reviews, and heavily use your equipment.
3. Mutuality of Obligation (MoO)
MoO defines an employer-employee relationship - the employee must work, and the employer must pay. If a contractor is obliged to continue offering work and you are obliged to continue paying for work, even if there is no given work, this indicates worker status.
Substitution is a strong indicator of whether a relationship is of a contractor or worker. If a contractor can offer a suitably qualified substitute for the role, the relationship is more likely to fall outside IR35.
The amount of control you exert over a contractor is also important. For example, suppose you require your contractor to comply with specific requirements not based on operational necessity. In that case, they are more likely to fall inside IR35 than a contractor who has complete control over their working patterns and styles.
You can use HMRC’s Check Employment Status of Tax tool(CEST) to help determine an individual’s employment status.
How to work with an “outside” IR35 contractor
If you believe a current or future contract falls outside IR35, you can continue working with them through their PSC after issuing an SDS. To reduce the risk of an IR35 SDS being challenged by HMRC, you can obtain insurance to cover and protect your assessment.
How to work with an “inside” IR35 contractor
If you believe a current or future contract falls inside IR35, you have two main options for engaging them outside of a direct employment relationship:
1. Umbrella company
An umbrella company acts as an intermediary employer between you and the worker. You pay the umbrella company, and they pay the worker minus any tax and NICs.
It is crucial to conduct your due diligence when using an umbrella company, as some have been associated with tax avoidance schemes that could result in financial liability, alongside reputational damage for your business.
The TechStream Group only work with FCSA-accredited umbrella companies.
2. Limited company (PSC)
You can continue paying the worker’s limited company or PSC, after deducting tax and NIC. However, this can be complicated and is not a practice widely recommended.
While these changes might feel concerning, it is important to remember public sector end-users have been responsible for status determination since 2017, with positive results, including:
Statement of works that provide workers and end-users with clearer deliverables and faster results.
Clearer hiring policies that reduce risk and provide contractors with more clarity.
Variety in talent thanks to the ease that contractors can move between public and private sector work.
If you’d like to learn more about preparing for IR35 and the implications on your business, get in touch with our specialist team today. Download our free solutions guide to the IR35 reforms here.