IR35 legislation originally came into being in the year 2000 and hit contractors working predominantly in the IT, banking and public sectors. It aims to ensure that HMRC collects tax from those people who are essentially ‘employees’ disguised as limited companies to reap tax benefits.
Since then, the legislation has placed the onus on the individual contractor to determine their employment status – but in reality, many contractors either don’t realise or have chosen to ignore the rules.
Changes to the legislation mean that from April, it will be the responsibility of the end-user client – and in some cases employment agencies – to ensure all their contractors are compliant with IR35 legislation. Those business who aren’t compliant with the new rules could face large tax bills and penalties.
Although the rules have been in place since 2000, responsibility for applying them fell on the intermediary (normally the contractor’s limited company). From April, responsibility for applying the rules falls with the end-user – the contractor’s client– most of whom are less willing to take a risk on the contractor’s tax status. The end-user must determine if the contractor is really a disguised employee. Liability for getting it wrong falls on the end-user if they do not make the determination or apply the rules. Sometimes liability can be passed to another link in the chain (such as an agency) if the fault lies with them.
The impact should not be underestimated. There are an estimated 170,000 contractors engaged by 60,000 end-user clients who may be caught by these new rules.
The off-payroll rules are designed to ensure that a contractor is taxed in the same way as an employee if in reality (applying the appropriate tests) they work like an employee, even if the label applied to them is self-employed. This is because HMRC receive less tax and National Insurance in respect of a self-employed individual than they do for an employee.
This obligation falls on the end-user, the contractor’s client. They have to determine this and then tell the contractor whether they think the contractor is caught by the rules. If there is another link in the chain, such as an agency, the determination is passed down the chain to the individual contractor.
There are two ways to test this. One, take advice from a qualified professional or two, use the Government online tool: https://www.gov.uk/guidance/check-employment-status-for-tax. However, there is scepticism in the freelance world as to whether this tool is weighted towards finding that a contractor is an employee.
If a contractor is assessed to be within the off-payroll rules, then the organisation paying the limited company (the end-user or a third party such as an agency) must deduct tax and NI from the sums paid as they would for an employee. That is outside the control of the contractor, although there is a process for the contractor to challenge this determination. This disagreement process involves the end-user considering the challenge and deciding whether their initial determination was correct or not. There is no appeal beyond the end-user client.
A contractor within IR35 will be taxed like an employee but not have any of the employment benefits that come with employment status.
They have four options:
Yes if the contractor is genuinely self-employed. If they are caught by IR35 then there has been a determination that they are not genuinely self-employed. They are then left with the options above.
The changes do not apply to small business – broadly speaking a business that has two or more of these features: turnover of £10.2m or less; balance sheet total of £5.1m or less; 50 employees or less.
End users, agencies and contractors should act now. Consider the appropriate test to see if the arrangement is caught – there are numerous factors but the main ones are:
End users and agencies should:
Through our strategic partnership with Ward Hadaway law firm, Ward Hadaway have developed a toolkit to assist with compliance. The Toolkit contains a specimen contract; detailed guidance; step by step guides and flowcharts; details of the factors to take into account for the status determination test; procedures for challenging the determination; and standard letters for the process.
Ward Hadaway can also advise on the IR35 legislation changes and discuss in more detail what these changes mean for you and/or your business.
This article has been drafted on esphr’s behalf by Ward Hadaway Law Firm. Ward Hadaway Law Firm are one of esphr’s strategic legal advisory partners and provide certain services to our customers through a range of different Legal and HR support services offered by ourselves to the Corporate market. The content of this article does not constitute legal advice and it should not be relied upon. Specific legal advice may be required to address your specific circumstance.