Will apply to medium and large businesses
The purpose of IR35 is to evaluate whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax.
Some contractors (and their hirers) might try to take advantage of the tax efficiency of working through a limited company, when in practice the contractor should actually be an employee.
The benefit for employers hiring workers in this way is that they don’t have to pay employers’ National Insurance contributions or give contractors employee benefits such as holiday and sick pay.
The benefit for contractors is tax efficiency.
But the rules are changing.
From April 2020, medium and large-sized businesses in the private and charity sectors will be required to categorise the tax status of their contractors, freelancers and workers themselves.
The new rules will apply to medium and large businesses.
Small businesses are not responsible for assessing whether IR35 applies.
The Companies Act 2006 defines a small business as a business with two or more of the following features:
- turnover of £10.2m or less
- a balance sheet total of £5.1m or less50 employees or fewer
It is important for businesses to take action now and not wait for the April 2020 introduction.
Many find the IR35 legislation complicated to understand.
Even HMRC seem to struggle a little as their record on successfully fighting IR35 cases at tribunal is variable.
This lack of clarity along with ambiguity over employment status guidelines has proven controversial since the law’s introduction.
So when does IR35 apply?
HMRC say that when determining whether IR35 applies to a contract or engagement, “you must work out the employment status of the person providing their services.”
HMRC go on to say that the “off-payroll” rules apply if the contractor “would be an employee if there was no intermediary”.
The intermediary in most cases is the contractor’s limited company (often called a personal service company).
Here are the key tests you can use to establish employment status.
- Supervision, direction, control – this relates to how much say you have over how your contractor/freelancer/worker completes their work. If they have to attend work at certain times or follow your direction then you are exerting control which falls within IR35.
- Substitution – can your contractor/freelancer/worker send someone else in to complete the work or is there a requirement for personal service? If they can’t send someone else, they are likely to be within IR35
- Mutuality of obligation (MOO) – is there an obligation on the employer’s end to offer work, and on the contractor/freelancer/worker’s part to accept it? This is called mutuality of obligation, and if it exists, the contract will fall within IR35. This is one of the key tests of employment status. If the contractor/freelancer/worker can work for others whilst working for you or is working to complete a particular project and there is no obligation once the project is over then it is unlikely that IR35 will apply.
Other factors to consider include:
- Own equipment – HMRC often try to argue that if equipment is provided by the client, the contractor/freelancer/worker is a disguised employee.
- Financial risk – self-employed contractors usually take a degree of financial risk, for example penalties and responsibility for fixing errors without a charge to the client.
- Pay – self-employed people are typically paid on a project basis, which might mean when the work is completed or at a particular project milestone
- Part and parcel’ of the organisation – if a contractor/freelancer/worker undertakes training provided for by the client, is subject to supervisions and appraisal or has people reporting into them then this points to employment status
- Business ‘on your own account’ – this looks at whether your if a contractor/freelancer/worker has an “actual” business. If they have a limited company, website and an office then this is helpful in demonstrating self-employment.
Make sure you clarify your relationship with the contractor/freelancer/worker before you start the contract by considering all of these principles.
HMRC also have a tool you can use to check whether IR35 applies to a contract
Click > Check employment status for tax
In reality IR35 status is a combination of IR35 case law and employment legislation, developed through case law over time.
It is recognised that the HMRC status test tool may not be entirely accurate as it doesn’t take into account the employment perspective of mutuality of obligation.
This is why both an HMRC and employment assessment should be carried out.
The message is to conduct your audit, review your supply chain and get IR35 ready now, even if you are a small business.
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