On 6th April 2020, the rules relating to off-payroll working for, known as IR35, are changing. At the moment the legislation applies only to the public sector, however, from April it will also apply to the private sector (including the third sector). As such, if your organisation uses contractors to undertake work for you, then you may be affected by the changes. The View HR team thought it would be helpful to put together a handy FAQs guide for our blog readers.
Will all businesses be affected?
Sole traders will not be affected, as their tax and National Insurance payments are determined by their self-assessment tax return, though which they are required to declare all profits as is the case currently. There will also be exemptions for small businesses who meet any two of the following:
- fewer than 50 employees;
- turnover below £10.2m; or
- a balance sheet of under £5.1m.
However, if you meet this definition, that doesn’t automatically mean that you can forget about IR35, as your business may be acting as an intermediary; for example, a small cleaning business that has three subcontractors who were hired to clean the offices of a large bank. In this case, the bank is the end client, and so may have liabilities under IR35, but may require information from the cleaning business to establish if this is the case or not.
Do we have to do anything if our contractors are happy with the current arrangements?
Successive UK governments have been keen to ensure that individuals do not circumvent their liabilities for tax and National Insurance, and legislation in this field has been in existence since the year 2000. IR35 legislation seeks to address this by clamping down on the use of a limited personal service company (PSC) to disguise what may really be an employment relationship. The current arrangements may well suit both parties, however, unlike employment law where redress for breaches is sought by employees through the employment tribunal system, the HMRC will take responsibility for enforcement if they consider there to be any unpaid income tax of National Insurance. As such, even if you and your contractors are happy with the arrangements in place, that doesn’t mean you should ignore IR35. Also remember that a unhappy contractor may try to later claim employment status…
Who will be liable if HMRC determines that there is any unpaid income tax or National Insurance?
Once the new rules are implemented in April, the end client will become liable for any underpaid income tax and/or National Insurance payment (rather than the worker). This means that telling your contractors to do their tax return, and then leaving it to them to sort out a higher than expected tax bill by themselves, will no longer be an option, as you will be responsible for determining their employment status.
What factors affect whether or not IR35 applies?
Whether or not IR35 applies will depend on factors relating to the contractor’s business as a whole and the nature of the working relationship with the client. Contractors should consider questions such as whether they spend the majority of their time working for one client or have multiple projects on the go at once, and how they bill for their services. When a client and contractor set up a new working relationship, factors that will be relevant include how ingrained the person will be in the clients business (e.g. are they on the organisation chart, and do they have resources such as business cards and a dedicated extension number?), and, crucially, is the contractor able to send a suitably skilled substitute to undertake the work agreed, or are they required to deliver the service personally?
What is CEST, and can I rely on it?
CEST stands for “Check employment status for tax”, and is an online tool available on the Gov.uk website here. The purpose of this is to be able to provide details of relationships you have with contractors and subcontractors, and establish if IR35 is applicable. However, HMRC have said that they will not honour the result of a CEST assessment if it is believed that the answers given were untrue to manipulate the result, and so there is no benefit to answering dishonestly. Furthermore, questions about the reliability of CEST have been raised. As such, it may be appropriate to seek further advice if you are unclear. Again, remember that HMRC’s and the Employment Tribunal’s determination of employment status may not always be the same!
How do I prove that my contractors are outside IR35?
The contracts you have agreed with your contractors will be able to provide you with some of the necessary evidence, as this document will set out the intended working arrangements. However, how the working arrangements operate in practice can also be considered. So, for example, if the contract says that the contractor will be responsible for providing their own IT equipment, but you then purchase a laptop and phone for their use, then the contract will be seen as not being an accurate reflection of real working practices. As such, it is important that you agree what the relationship will be with your contractors, set this out in writing and then ensure this is adhered to. If you are unhappy with an IR35 decision, the HMRC has introduced a “client-led disagreement process” to provide an opportunity for decisions seen as inaccurate to be overturned.
Should I just make all of my contractors employees instead?
In some cases, where there is in effect an employment relationship already, this is likely to be the best course of action. However, there are factors to take into account when deciding upon this course of action. First, you have to establish if this is what the person wants, as it may be that they are developing their business model in response to the IR35 changes. Secondly, you will need to bear in mind that this may well change may reduce their take-home income. When IR35 was introduced to the public sector in 2017, a survey from law firm Brookson Legal of over 500 contractors found that 50% asked for a pay increase. As such, it cannot be assumed that changing contractors to employees will be a simple switch. However, if they are a key part of your team, it is worth having a conversation.
If you have any further questions about the potential implications of IR35 on your business, determining employment/self-employed status or require assistance with putting employment contracts in place for contractors who are becoming employees, please do get in touch and the View HR team will be happy to discuss with you.