*** EXTENSION OF IR35 POSTPONED ***
The government has announced that the extension of IR35 to medium and large companies in the private sector is being postponed by a year, to 6 April 2021.
The IR35 tax rules are aimed at making sure that where a contractor who provides their services through an intermediary (often their own limited company) would be considered to be an employee if that intermediary were not used, that contractor is subject to broadly the same tax and National Insurance contributions as employees.
Watch the announcement in the House of Commons.
With thanks to Daniel Barnett Employment Barrister for the 'hot off the press' information
What is IR35?
Alongside the usual April changes to legislation and rate increases is a change in the IR35 tax rules. This will have a significant impact for medium and large employers managing a workforce that includes contractors where the company meets at least two of the following:
- Annual turnover of more than £10.2 million
- Balance sheet total of more than £5.1 million
- More than 50 employees
(Note: third sector organisations are also covered by these changes but small companies will continue to remain outside of any responsibility for determining employment status and applying the tax rules, this will continue to reside with the intermediary company).
IR35 tax rules were originally introduced in 2000 to prevent employers avoiding tax liabilities by disguising employment status. These rules are designed to ensure that where a contractor provides their services through an intermediary (usually their limited company) and the circumstances of the arrangement is that they would be considered to be an employee if that intermediary were not used, then that contractor is liable for broadly similar tax and national insurance contributions (NICs) as employees.
Prior to 2017, the intermediary (usually the contractor’s limited company) has been responsible for applying IR35 rules and deciding whether he or she would be an employee of the client. But in 2017 the government changed these rules for public sector contractors and employers, introducing new ‘off-payroll’ tax rules and from 6 April 2020 these changes now cover medium or large-sized organisations that use contractors.
How does IR35 apply to my business?
If you are a medium or large organisation as defined above, then from 6 April 2020, the responsibility for identifying the employment status of your contractors will now sit with you, as the client.
Determining employment status is not always straightforward – and the tests for tax purposes are similar, but not identical to those for employment status (you could be an employee for IR35 tax purposes but not be a fully-fledged employee for employment law purposes and vice versa!).
In basic terms, the following factors determine whether a person will be considered an employee:
- Personal service (work is done by the individual, no power to provide a substitute)
- Control over the engagement by the client
- Who provides the tools/other equipment used
- Whether the individual is subject to the client/employer’s disciplinary procedures
- Who assumed the financial risk for the engagement
- The degree of integration into the client/employer’s organisation
Loates tips for IR35
- If your organisation may be affected by IR35 changes on 6 April 2020, you need to act now.
- Audit your current arrangements with existing contractors – review contracts and the undertaking of that contract in reality – do any / all of the above apply?
- Consider a worst case assessment of potential additional costs arising where contractors are deemed employees for tax purposes, they may decide to move on - or negotiate a better deal that makes up for the amount they lose in tax/NIC. If your business is heavily dependent upon a contractor workforce, consider whether your business can afford this loss in goodwill and business knowledge, alongside the increased costs of finding, engaging and inducting new contractors.
- Following any initial assessment of risk, engage with all your contractors. Discuss whether the off-payroll rules apply to their role.
- If you have any uncertainty as to the IR35 status of any contractor, you can seek advice from a professional tax services provider or you could use the HMRC’s online CEST tool (Check Employment Status for Tax). CEST lets you input relevant information and, as long as it can be shown that this is genuine data and full and factual, then the client/employer can rely on the answer as a binding decision. Note that there are some improvements being made to CEST in time for April, so if you have checked before, you may wish to use it again around that time.
- Make a record of the decision your organisation makes, your reasoning and records of all payments made to each contractor, including details of all tax/NICs deducted where the contractor is deemed to be an employee under IR35.
- Issue each of your contractors with a status determination statement (SDS) confirming the off-payroll status (and decision behind this) for each. This is simply your documentation to detail how you arrived at your decision, however until that is issued, then you will be treated as the fee-payer. And keep your SDS under review for each contractor and ensure it is included in any revised / renegotiated arrangements with that contractor as a part of your compliance arrangements, down the line.
- There are government guidelines if either you or the contractor disagrees with your decision on your SDS with timescales for addressing any disagreement with your contractor, so ensure that your organisation/employers are aware of these.
Other considerations for IR35
Finally brief all your managers who currently, or may at some point, be responsible for recruiting contractors on these new IR35 rules. And, once the tax implications of IR35 have been determined, ensure that those employees who may have been newly issued with a SDS are also assessed under existing employment legislation to ensure that the organisation is also confident of their employment status under employment law as well as HMRC regulations as one finding does not automatically lead to the other.
If you are unsure of employment status and your responsibilities towards any contractor assessed as an employee under IR35 rules then speak to your HR Department or contact us for professional guidance on your legal responsibilities and practical advice on how to implement these.