After a period of delay due to the Covid-19 pandemic, changes to the IR35 legislation took effect on 6 April 2021 and have had significant implications for businesses and contractors.
Understanding IR35 legislation and its implications
IR35 legislation aims to ensure that HMRC collects tax from those people who are essentially ‘employees’ disguised as limited companies to reap tax benefits.
Originally, it placed the onus on the individual contractor to determine their employment status. However, the changes to the legislation mean that it is now 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 rules could face large tax bills and penalties.
Q. How does IR35 affect businesses?
Although the rules have been in place since 2000, responsibility for applying them initially fell on the intermediary (normally the contractor’s limited company). Recent changes have shifted the responsibility to 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.
Q. What is the impact on the contractor community?
The impact is significant. 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.
Q. How should businesses and contractors test whether they fall within IR35?
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.
- Take advice from a qualified professional
- 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.
Q. What can contractors and businesses that fall within IR35 do to minimise the impact this may have on their business and income?
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:
- Accept the position and receive less net income
- Renegotiate fees if possible, to mitigate the effect
- Work as an employee to receive less net income but obtain employment benefits
- Use an umbrella company – although there is a limit as to how beneficial these will be.
Q. Is remaining a sole trader or limited company the best business structure to adopt post IR35 implementation?
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.
Q. What are your top tips for businesses, agencies and contractors who think they may be affected by this?
End users, agencies and contractors should consider the appropriate test to see if the arrangement is caught – there are numerous factors, but the main ones are:
- Is there an obligation on the end-user to provide the contractor with work?
- Does the contractor need to do the work personally?
- Does the end-user control the work? That is: when, where, how etc the work is done?
End users and agencies should:
Q. Where can we get help?
Through our strategic partnership with Ward Hadaway law firm, we 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.
To get your IR35 toolkit or if you require any advice, please contact us and we will ensure we put you in contact with a specialist from Ward Hadaway immediately. Call 0330 124 084 or email [email protected].
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 clients 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.
