IR35 has been with us for many years. However, it has not been an issue for businesses employing contractors until now. However, there is a seismic shift about to take place.
What is IR35?
IR 35 refers to the tax legislation under which contractors working through an intermediary are taxed. Historically the end user, usually the client has not been concerned about IR35 because it has been the responsibility of the intermediary to determine whether the consultant would, but for the intervention of the intermediary have been an employee of the end user.
The consequence of finding that an employment relationship would have existed is that the intermediary has to pay Employers’ National Insurance Contributions and deduct tax and employees’ NICs.
HMRC have struggled to land any meaningful blows and has lost more cases than it has won. It has proved a very expensive tax to collect because every assessment it does will involve only one individual.
How do HMRC determine if the contractor would be an employee?
There are four principal factors to take into account
- Personal Service – does the individual undertake to provide his own skill and service
- Control - is the individual subject to a sufficient degree of control?
- Mutuality of Obligation – is there an obligation on the individual to do work and on the other party to pay the individual?
- Consistency with employment – are the other terms consistent with it being a contract of employment?
However, the test is not easy to apply. HMRC have produced an online CEST tool to help individuals determine if they are caught but it has a number of deficiencies.
How is IR35 changing on 6 April 2020?
(i) Small businesses are not affected
Small businesses will not be affected by the changes. A small business is one which satisfies two of the following criteria
- Annual turnover of less than £10.2 million;
- A balance sheet total of £5.1 million, and
- Less than 50 employees.
(ii) End users to carry out assessments
Responsibility for carrying out the assessment passes to the end user to determine whether, but for the intermediary the consultant would have been an employee. The end user is required to carry out the Status Determination with “reasonable care.”
The end user is obliged to carry out the Status Determination and pass a copy of it to the agency with which it has contracted and also to the consultant. That assessment must be carried out before the consultant undertakes any work. If it is not, or the end user does not provide a copy of the assessment to the consultant the end user will be responsible for paying tax and Employer NICs until the Status Determination is completed and a copy provider to the PSC and consultant.
If the Worker and PSC disagree with the determination the end user must consider the reasons given; decide what to do; keep a record of the decision. The response must be given within 45 days of any appeal otherwise liability to pay tax and employers’ NICs passes to the end user.
(iii) Transfer of Liability
A further consequence of the change is that end users are exposed if their supply chain contains contractors operating through intermediaries because they will be responsible for conducting the Status Determination; failure to do so will leave them liable to pay tax and Employers’ NICs. They will also need to ensure that the Status Determination is passed down the supply chain until it reaches the party liable to pay the PSC.
Further consequences are that if the paying party is no longer in existence when HMRC begin a tax investigation liability for tax and Employers NICs liability to pay will pass to the agency nearest the end user and ultimately the end user itself. This leaves end users in a vulnerable position.
What should businesses do now?
The first step is to identify if there are any contractors in the supply chain.
Having done that the end user needs to carry out its Status Determination with “reasonable care”.
Once it has done that it will be able to identify where there may be issues and how it intends to deal with those issues.
To find out more about the new IR35 laws about how they will impact your business sign up for our webinar on the 12 December.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.