What is IR35?
IR35 is a piece of legislation that allows HMRC to assess whether a contractor is an employee or not. IR35 considers the way in which an individual works through their own personal service company (PSC) for a client. HMRC would like to view a contractor as working in the same way that an employee would, and apply PAYE and NIC’s preventing the contractor from being self-employed.
What is changing?
At the moment responsibility for determining whether IR35 applies sits with the contractor. From April 2020 the responsibility for determining whether IR35 applies will move from the contractor to the client, only if the client is a medium or large organisation.
The changes do not apply to small companies. Small companies and PSC providers still need to follow the existing rules and ensure ongoing compliance.
The end client will have to take reasonable care in considering IR35 and issue a Status Determination Statement confirming the position. The client or intermediary paying the PSC will then have to operate PAYE if they are deemed to be caught by this legislation.
An organisation will be deemed small and subject to the old rules if it can show that two of the following do not apply:
• Turnover lower than £10.2m
• Balance sheet total of less than £5.1m
• 50 employees or less
What is the impact of this change?
From April 2020, medium and large size companies will be held liable by HMRC for any and all PAYE and NIC liabilities that would be due on a failed Status Determination challenge.
How can companies prepare for the change in April?
If you are a medium/large end client there are various options to consider, some include:
- One approach that has been adopted is ruling out the use of Ltd company contractors going forward. This is an extreme approach to the legislation and whilst it means there is zero risk, it may mean that key workers move on to other organisations or that costs increase significantly.
- A more common approach is to consider IR35 for contractors, provide a Status Determination Statement and pass this on to the next party in the supply chain. This fulfils a client’s requirement under the legislation and can ensure they are compliant, yet commercial and retain key workers.
- The client could rely on agencies to undertake the assessments. This is possible but needs to be structured in the right way because if challenged the client will still need to be able to show that the client has taken reasonable care. It may become more difficult to demonstrate this if an agency has carried out the assessment on their behalf.
- A statement of works document could be implemented. The principle behind this is that there is a shift in the work being carried out and a third party takes on ownership of part or all the project and all associated responsibilities. This effectively means that the third party becomes the client for IR35 purposes and as such takes on the responsibility for determining IR35 therefore removing all risk and hassle form the client.
How do you know if IR35 applies?
IR35 is a very complex area and one in which judges sometimes disagree. The courts have however developed three main principles they would expect to see in an employment relationship:
- The individual must be required to carry out the work personally (i.e. they cannot use other people to provide the services),
- They must not be subject to a sufficient enough degree of control to create an employer/employee relationship
- There must be no mutuality of obligations between the parties so that neither party is under obligation to provide any work or services to the other during the contract term.
Once these key areas have been considered the courts will go on to look at whether there are any other factors which are inconsistent with an employment relationship. If there are enough factors to show the individual is in business on their own account, this can also be enough to show IR35 does not apply.
How can RIFT Legal Services help?
We are experts in the field of IR35 and can provide you with the advice and defence you need should HMRC carry out a compliance review. IR35 is a risk to businesses but this risk can be significantly mitigated. HMRC’s track record in challenging companies under IR35 and winning cases at the tax tribunals is very poor, companies should not be scared into operating PAYE when it is not necessary.
Whether it be reviewing the working relationship, producing the status determination statements, reviewing contracts, auditing a supply chain, providing training or defending your case at a tax tribunal we can provide as much assistance with IR35 to ensure you feel confident and protected.
Kye Burchmore LL.B (Hons), Director, RIFT Legal Services
Kye Burchmore has over a decade of experience as a tax consultant. With a wealth of knowledge on legislation, case law and litigation, Kye has worked as a tax consultant at one of the country’s leading employment status tax practises specialising in defending employment status disputes, IR35 enquires and expenses legislation challenges.
In 2019 Kye was approached by Bloomsbury to write a book about IR35 and off payroll working which is due for publication in May 2020.
Kye also advises and defends a variety of companies on contentious areas of tax law and has written extensively on the issue for publications including Tolley’s Practical Tax, Simon’s Tax Briefing and Accounting Web.