In this simple guide, we’ll run employers through what IR35 is, why it exists and why it’s imperative that your business understands what it means when using self-employed workers.
IR35 (also referred to as Intermediaries Legislation) is by no means a new concept – it was actually introduced into UK tax law way back in April 2000. It’s been a controversial piece of legislation ever since and hit headlines a few years ago when the government announced it would be making some major changes to the current IR35 rules. These new changes were introduced earlier this month, a year later than the proposed date due to the Covid-19 pandemic.
For those who are wondering, the Government define IR35 as “off-payroll working through an intermediary.” In simple business terms, that’s any contractor your company hires and pays through an intermediary service, who would otherwise be an employee if they provided the same service directly. Self-employed individuals can offer their services through various intermediaries, including a personal service company (PSC), a limited company or even a partnership.
Why Does IR35 Exist?
IR35 was introduced to tackle a problem the government has faced for quite some time – self-employed workers playing the system in order to pay less tax, also known as false-self-employment.
It came to light that thousands of individuals were resigning from their job at a company, only to come back to work the very next day as a contractor. These people soon became known to the HMRC as ‘disguised employees’ as they are essentially an employee in every sense, except in title.
IR35 was designed to address this issue to ensure that those working through an intermediary end up paying the same tax and national insurance as those who are an employee at the same company.
Essentially, as far as HMRC is concerned, if it looks like a duck, walks like a duck and quacks like a duck, then it’s a duck. If your business pays contractors who work like employees, then as an employer, you must treat them like one.
Ultimately, the government hoped that the introduction of IR35 would weed out those who were abusing the tax-efficient structure of self-employment and by doing so, establish a clear divide between the two contrasting employment statuses.
Key IR35 Status Indicators:
An in-depth assessment must be undertaken to determine if a worker is outside of IR35. The key factors that determine the IR35 status of workers are as follows:
1. Personal Service and Substitution: Is this working arrangement strictly a personal one or can the contractor provide a substitute in their place? This is important because the right to do so would mean that this contract likely falls outside of IR35. From HMRC's perspective, whilst a contractor provides a service to a client, an employee provides a personal service to an employer, meaning they can't send someone else in their place. A genuine right to substitution makes all the difference where the scope of IR35 is concerned.
2. Supervision, Direction and Control (CDC): This is an important status indicator that helps determine whether IR35 comes into play. Ultimately, you need to establish who is in control - is it you (the client) or the contractor who decides where, when and how work is carried out? Whereas employees are usually under the supervision and control of their employer, contractors are expected to have more leeway with their working activities due to the autonomy that comes with self-employed status.
3. Mutuality of Obligation (MOO): Does the contractor you're paying know that they are providing their services for a specific task or do they instead expect to be given a steady workload on a constant basis? If there's an expectation of further work once the task at hand is complete, there is then a mutuality of obligation arrangement in place. Generally speaking, a rolling contract can indicate that a contractor is more like an employee, rather than finishing work once the initial contract period ends and potentially providing services again at a later point.
Other factors will also be considered, including whether the contractor uses equipment (such as laptops and mobile phones) provided by the client and how integrated the contractor is in a given organisation. For example, do the contractors attend office parties or receive company perks (the kind usually accorded to employees) like private healthcare or use of the employee car-park? All of this should be taken into consideration when establishing if a contractor falls inside of IR35.
The Impact of IR35 On Businesses - What Changed From April 2021?
The rules changed when new IR35 legislation was introduced earlier this month and the effects now also reach the private sector too - medium and large-sized private sector businesses must now comply with the conditions set out in IR35 (reforms for IR35 were introduced for workers in the public sector back in 2017).
As of April 2021, the responsibility for determining a contractor’s employment status now firmly lies with the end-user business. The legal obligation to assess whether IR35 applies has always remained with the worker’s intermediary, however, the game has changed significantly.
The roles have been reversed and the responsibility of conducting an assessment has been transferred to the business using the service provided by the off-payroll worker. If whilst doing this, your business discovers that a contractor is working like an employee, then IR35 rules must be applied, and you’ll need to treat the contractor as an employee for tax purposes.
For businesses planning to duck the issue of IR35, our advice is… just don’t. That’s a hugely risky strategy and if caught, businesses will face a hefty fine from HMRC. Whilst the government have said that it will waive any resulting penalties for the first 12 months (that is, where mistakes are made – fines will not be waivered if there is evidence of deliberate non-compliance), they also confirmed that they will name and shame deliberate defaulters. The advice is clear – either get your taxes in order or pay a hefty price.
Speaking of penalties and sanctions, you might be speculating about how much your business will need to pay if it’s caught dodging IR35 rules. Firstly, you’ll need to pay back every penny owed to HMRC for the tax and National Insurance contributions that weren’t paid. Then you’ll also need to pay a penalty which is a percentage of the tax and National Insurance payments HMRC would have lost had they not conducted their enquiry. Furthermore, the exact percentage your business will have to pay will be calculated by looking at your behaviour, whether you knowingly provided inaccuracies and will be in accordance with Schedule 24 of the Finance Act 2007.
Small Businesses Are Exempt To The New IR35 Rules:
A small end-user is not required to apply the new IR35 rules and the obligation to carry out an assessment will remain with the worker’s intermediary, as before. For your business to be considered as a small end-user, you will need to prove that your company is truly a 'small business' - as defined by the Companies Act 2006. Your business will need to meet at least two of the below criteria:
Your Next Steps As An Employer
A strong starting point is to use the Check Employment Status for Tax (CEST) service, which is a tool devised by HMRC that helps determine whether contractors your business use are classed as employed or self-employed.
As stated on the guidance provided by HMRC, there must be a contract in place to ascertain whether workers fall into the employed or self-employed category and the above tool will automatically assume as much.
In order to fully establish if a contractor falls inside IR35 or not, you will need to know a number of things first. You’ll need to have the details of the contract to hand, fully comprehend the worker’s responsibilities, understand who decides what work needs doing, as well as when, where and how. You’ll also need to know exactly how the worker will be paid and if they will receive any corporate benefits or reimbursement for expenses.
Once you've determined the IR35 status of a contractor, your business must then provide the contractor with a 'Status Determination Statement' - otherwise known as a SDS. This is a new requirement that was introduced with other changes earlier this month and the intent is to confirm the IR35 status of each assignment by providing a SDS to each contractor your business uses.
It's important to avoid a blanket approach with IR35, as HMRC has warned that companies must demonstrate 'reasonable care' when conducting IR35 status assessments, so 'blanketing' could mean your business ends up in hot water. The best approach is to determine the IR35 of each individual separately and to undertake a thorough assessment each and every time to ensure no mistakes are made.
Perhaps the right decision for your business will be to seek help from experts who can accurately determine whether IR35 conditions must be met with each contractor your business uses. A small business loan could provide your business with the funds it needs to access a consultancy service that can give you all the answers you need, with zero stress involved. Where off-payroll rules and tax are concerned, we find it's often best to leave it to the experts!