Don’t place any bets on IR35 changes false starting again in April 2021. This is highly unlikely given the current climes, making it highly likely to be a sprint to the finish post. HMRC will be hunting for every pound and penny to stave off the country’s mounting debt caused by governments’ covid-pandemic financial support, not to mention them potentially looking to make an example by taking down a ‘big scalp’; heed the warning and be compliant.
Let’s have a recap; IR35 was introduced around 20 years ago courtesy of highly paid IT execs initially, then others who jumped on the gravy-train, who were avoiding PAYE tax by being paid via dividends through creating Limited Companies – aka an intermediary vehicle or personal services company (PSC).
Call it a double or triple rollover, as not only were they paying less overall tax on earnings by taking advantage of the lower taxation treatment of companies versus the higher rate for individuals, but also claiming company running expenses – ‘business’ trips, car, mobile phone etc…..some life, but only for some!
It’s unsurprising HMRC sought to plug the gaps, doing so by introducing a new shiny piece of legislation called IR35, designed to pursue so-called contractors who are actually “disguised employees” to prevent tax avoidance. Those in ‘disguise’ are for all intents and purposes are acting as a permanent employee, such as being instructed how to do the job, working to set hours, wearing a company uniform, reporting to a manager, having loose assignment timeframes and even having a jolly at staff parties.
So, what’s changing? IR35 legislation reforms started in the public sector and from April 2020 an extension was due to be applied to the private sector, however the covid-pandemic but the breaks on its implementation. At present, the burden of proof is on the contractor (temporary worker operating via their own Limited company or PSC) to show compliance with IR35 tax rules; if they get this wrong then HMRC holds them personally liable for tax it deems due.
However, from 6 April 2021, this responsibility moves from the contractor to the fee payer or end-user, although this burden does not apply to small businesses, i.e. less than 50 employees, turnover up to £10.2 million and/or has a balance sheet less than £5.1 million (two of the three must be satisfied).
Come April, it’s medium to large companies that utilise contractor services who are going to be responsible for taking “reasonable care” for IR35 compliance, meaning all off-payroll contractors must be assessed via a ‘Status Determination Statement’ (SDS) and a decision made on their employment status for tax purposes. Fall at this hurdle and a business could be liable for unpaid tax (not to mention the fines).
So, The inevitable ‘Hokey Cokey’ dance may then ensue when deciphering ‘who is IN and who is OUT’ of the realms of IR35. A whole industry has been formed to attempt to answer this conundrum and even the HMRC CEST tool (Check Employment Status for Tax) is considered lacking by its inventors, as it is rarely conclusive. Generally, if you can leap the big four tests, the contractor is deemed outside the scope of IR35 i.e. no mutuality of obligation to accept work exists, the contractor can provide a substitute to perform the work (at their cost), there is minimal supervision/control over the contractor and they are not part and parcel of the organisation
Other ways to check, and prove, a contractor is genuinely independent is by showing that they provide their own equipment, shoulder financial risk and do business ‘on their own account’, and by having a contract in place that paints a true supplier and customer relationship picture, providing payment on project conclusions or milestones.
You should have danced this dance already, if you were ready last April, although it’s a good idea to assess your worker population again as the landscape is likely to have changed. This is where we come in; HR Solutions by RE Recruitment can offer you support and expertise in conducting contractor audits to help you determine how you will approach their status going forward. This might mean either bringing them under PAYE, setting up Statement of Works (SOW), utilising an Umbrella company or operating via a consultancy model.
Why not join our Free Webinar – ‘IR35 – everything you need to know’. Delivered in conjunction with RE HR Solutions and Orange Genie – Thursday 21st January – 11am to mid-day.
To register email: Marketing@rerecruitment.com
One thing is for sure ‘fail to plan, prepare to fail,’ so get in touch with our team at firstname.lastname@example.org