The changes to the IR35 rules in the private sector are causing concerns for medium and large-sized businesses across the UK. From April 6, 2020, these organisations will be responsible for determining whether a contractor is inside or outside IR35. If an HMRC investigation results in any penalties, it is the fee-paying client that will be liable for back taxes, National Insurance contributions, interest and late payment fees.
Businesses are now reviewing their contractor workforce plans, hiring practices, payroll processes, and relationships with recruitment agencies in order to ensure they are compliant with the legislation when the changes get rolled out.
Do the IR35 changes apply to my business?
This change applies only to medium and large-sized businesses. This includes any company that meet two of the three following conditions for the last two consecutive financial years:
- Over £10.2 million revenue
- Over 50 employees
- Over £5.2 million on the balance sheet
Even then, a business only legally gets classified as new size at the beginning of the next government fiscal year (the following April).
Who is liable?
In situations where a contractor is deemed to have been incorrectly placed outside IR35, the liability sits with the organisation that pays the contractor (i.e. the client or the recruitment agency). There are situations where this liability passes to the client e.g. if a determination hasn’t been made or hasn’t passed down the supply chain, or the fee payer is unable to pay. By using a reputable and diligent recruitment agency with a strong financial record, these risks are minimised.
What does inside or outside of IR35 mean?
Inside IR35 –The contractor is considered, for tax purposes, to be an employee of the client due to the nature of their role written in the contract and in practice.
Outside IR35 – The contractor is considered to be a legitimate independent business providing a product/service for a client due to the nature of their role written in the contract and in practice.
Are my contractors inside or outside of IR35?
It all depends on the relationship between the contractor and your business, as laid out in the contract and working practices. A few key factors that should be considered:
- Direction and control: Does the contractor have the authority over the work they do as well as how, when, and where they do it?
- Substitution: Is the contractor able to hire someone to do their work for them / provide them with substantial help with the work?
- Mutuality of obligation: Is the client free to not provide the contractor with continuous work once the contract has ended and, if they do, is the contractor free to decline further work from the client?
- Financial risk: Is the contractor required to rectify defective work at their own cost? Do they have their own insurances?
If the answer to the questions above is ‘yes’, then the contractor may be considered outside of IR35.
If any of the answers to the questions above is ‘no’, then the contractor is inside IR35 rules and will be taxed on their earnings through the normal employee PAYE scheme.
How can my businesses remain compliant?
In order to remain compliant with IR35, based on the draft legislation, from 6 April 2020 your businesses will need to:
- Provide the contractor and the recruitment agency (where applicable) with an IR35 status determination statement.
- Demonstrate reasonable care when making the status determination, including considering the key factors discussed above.
- Respond to any disagreement (with reasons) made by the contractor or the agency (where applicable) within 45 days.
- Notify the contractor or the agency (where applicable) of the business’s change to a small business (as the new rules will not apply to them at that point).
We can help
We have worked with clients in the public sector who have already been affected by the rules under IR35 since 2017. These clients include HMRC, Home Office, Ministry of Defence and police forces, and we currently provide support to our candidates and clients regarding the new changes.
- Manage contractor communication and dispute resolution on your behalf.
- Guarantee that your legal requirement to have used ‘best endeavours’ to arrive at the determination has been met.
- Manage the determination review process on your behalf, providing a single, simple questionnaire to the relevant person within your organisation.
- Indemnify you against all costs, fees, penalties and liabilities arising from any challenge relating to the determination or the subsequent engagement.
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