What will the IR35 rule changes mean for businesses?
Across all sectors, businesses have traditionally relied on the services of self-employed contractors, consultants and freelancers to supplement their permanent workforce.
However, from 6 April 2020, the changes to the IR35 rules will impact the way services of such contractors are purchased, forcing businesses to review their existing business contracts and relationships.
How we arrived at this point
By providing their services to an organisation via an intermediary, usually a personal service company (PSC), contractors, and the client company using them, were able to enjoy significant tax advantages.
However, HMRC’s belief that PSCs were specifically being used as tax avoidance vehicles led to the implementation of the off-payroll working rules (otherwise known as IR35) in 2000, designed to address ‘disguised’ employees.
In 2017, the IR35 rules were amended. Public sector organisations were made responsible for determining the employment status of those they contracted via PSCs and for paying the income tax and NIC for those deemed to have employee, rather than self-employed status.
From 6 April, this requirement is being extended to large and medium-sized businesses in the private sector.
What now for employers?
All client companies in the private sector will have to comply unless exempted by meeting at least two of the following criteria:
· An annual turnover of less than £10.2m
· Balance sheet total of less than £5.1m
· Fewer than 50 employees.
Non-exempt organisations must determine the nature of the employment relationship they have with their contractors. The four main principles on which the relationship will typically be judged are:
1. Control: what control do you have over the contractor (e.g. what, how, when and where they work)?
2. Substitution: can the contractor substitute a suitably qualified person to act in their place?
3. Financial risk: how much financial risk is borne by the contractor?
4. Mutuality of obligation: are you obliged to give the contractor work and are they obliged to accept any work you give them? (The HMRC online test to check employment status, CEST, does not consider Mutuality of Obligation, assuming that it exists in every contractor engagement).
Having assessed the employment status of their contractors, the organisation must issue them a ‘Status Determination Statement’ (SDS) which confirms whether the contractor is genuinely self-employed or now considered an employee, giving reasons for the determination.
HMRC will deem the client company liable for tax and NI contributions until the contractor (and agency or other organisation that contracts with the client company) is told of the status determination and reasons for it.
When the contractor is deemed to have employee status, subject to tax and NI contributions, both parties will need to consider how to deal with the additional tax cost.
Drawing the right conclusion
Organisations that employ the services of contractors and those people currently providing those services, either directly or via a PSC, should review the terms of their engagement thoroughly.
HMRC shows no sign of softening its stance towards those it suspects of tax avoidance and it will be learning from experience to improve its future success rate in court.
Do not be tempted to bypass IR35 by other means and treat any advice to implement a tax avoidance scheme with considerable caution, as most do not work and do not have HMRC’s blessing.
Tina Chander is a partner and head of the Employment team at leading Midlands law firm, Wright Hassall and deals with contentious and non-contentious employment law issues. She acts for employers of all sizes from small businesses to large national and international businesses, advising in connection with all aspects of employment tribunal proceedings and appeals.
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