IR35 is a topic that’s been talked about, and on many of our minds right now, particularly with the revised legislation from April 2020 fast approaching. From this date, it will be an employer’s responsibility to determine an individual’s employment status.
But what does this legislation mean, and how will it affect you?
Here’s what we like to think is a simple run down.
What is IR35?
IR35 is a piece of rather controversial legislation. It was introduced back in 2000 as a self-assessment tool for contractors who, after setting up and working through their own limited company (or personal services company “PSC”) essentially paid less tax and National Insurance than if they were classed as employees working for the same client.
This is because Limited companies and contractors are naturally given a wider variety of tax reliefs than employees subject to PAYE. For example, a full-time employee drawing an annual salary £120K will pay £5K more than their contractor counterpart. Contractors will also be exempt from NIC if they pay themselves dividends.
Accordingly, individuals have taken advantage of this, mainly through leaving their job as a full-time worker and then returning to the same position as a contractor. This was a particularly common move after a redundancy situation, where ex-employees would be called back as contractors on a name-your-price basis.
HM Revenue & Customs has now concluded that the current IR35 self-assessment isn’t working. They have decided that if the contractor/client relationship mirrors an employer/employee relationship, then mutual obligation has likely been demonstrated; the contractor is in reality a ‘deemed employee’, rather than a disguised employee.
…And this is where the revised legislation steps in for private sector organisations from April 2020.
Cut and dry?
Not really. While the explanation of why is easy, HMRC don’t make it so easy in terms of black and white, to distinguish between contractors and employees, or who should be taking note of whether the new rules affect their own business. As a result, it’s left to both the individual and employer to ask certain questions in order to gauge the status.
This is known as a ‘hypothetical contract’ by looking at the work being done, contracted times, working practices and the relationship between the worker and the client.
Amongst others, key questions to consider include, are they able to complete the work personally or send a substitute? Do they have control of the contract? Do they provide their own tools and materials?
These questions can help determine whether someone should be placed on the payroll, or continue working as a contractor.
Your responsibility, our advice to you
From 6 April 2020, the new rules will likely apply if you are one of the following;
- A medium or large private sector business; this includes some charities and third sector organisations;
- The end user of the worker’s services;
- Fee payers in the recruitment sector;
- Contractors providing services to medium/large companies;
If you are an end user but running a smaller business with two or more of the following criteria, (as defined in the Companies Act 2006), then current contractor arrangements will continue under existing IR35 assessments
- A turnover of £10.2million or less;
- A balance sheet total of £5.1million or less;
- Fewer than 50 employees;
Remember too that contractors themselves who fall foul of the law, can also be investigated and penalised accordingly, including back payment of any underpaid liabilities as HMRC see fit.
If the new rules affect your business, then you will be responsible for determining your worker’s status from April 2020. There are many types of business which could potentially be affected. These can include;
- Opticians’ Practices appointing locums on long term stand-in arrangements
- Freelancers in photography and creative media
- Recruitment agencies
- Construction where subcontractors work solely for the contractor, or where CIS has not been established
- Fixed term support staff in nursery or early years schooling
Any other businesses where paid ‘interns’ are not in full time education, or where individuals are taken on to undertake defined projects such as, IT infrastructure, management consulting/restructuring, web and social media design.
That’s where AEL come in. We speak in simple, plain language to help you understand where to start and we’ll guide you every step of the way to ensure you’re on the right side of the law.