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If you are a business who engages with contractors or you are a worker who uses a personal service company, you may have heard about IR35. Contractors, recruiters and employers should make sure they have taken the time to understand the rules.
As with many new tax regulations, it’s easy to be blinded by the detail and it is often hard to identify what is important. Melanie Hicks and Daniel Tomassen from HW Fisher’s Tax Team share ten key points that both workers and employers should be aware of:
First introduced in April 2000, IR35 is tax legislation designed to address the increase in workers supplying services via an intermediary (e.g. via a limited company). The use of an intermediary may allow both the worker and the company to reduce their tax liabilities. This is because the payment in return for services is made gross without the deduction of income tax and NIC (which would be the case if they were an employee).
HMRC argue that if it were not for the use of the intermediary company then the worker would be deemed to be an employee. The IR35 rules ensure that these workers pay broadly the same income tax and national insurance as employees.
IR35 tends to apply when the following conditions are met:
When the IR35 rules were first introduced, the onus was on the worker to assess whether they were caught by the rules. Despite a few high profile cases, the sheer volume of the number of potential enquiries was unworkable and therefore the impact on the Exchequer’s coffers has been very limited. This lead to the rules being amended by HMRC in 2017, so that public bodies who engaged contractors were required to assess whether the contractor was caught by the IR35 rules. If so, they were required to withhold income tax and NIC and pay this directly to HMRC. This change led to a flurry of high profile cases, many involving household names.
From April 2021, the rules have been further widened to include medium and large-sized businesses in the private sector, these businesses are now also responsible for deciding if the IR35 rules apply to each contractor they engage.
The legislation only applies to medium and large businesses. If you are a single entity and meet two or more of the following conditions you will need to review your supply chain:-
The position for groups and joint ventures is a little more complex and should be checked carefully.
Determining whether someone is an employee is very subjective and is determined by the facts of each case, aided by relevant case law.
Some factors (though not an exhaustive list) which will be relevant include:-
Should HMRC enquire into the status of a worker, case law shows that they place more reliance on how the contract is operating in practice than what the contractual terms say. End-users should therefore keep this documented and under regular review.
HMRC have introduced a handy Check Employment Status for Tax (CEST) tool. The test reviews the status of a particular worker in respect of an engagement. If answered truthfully and correctly, HMRC have said that they will accept the results from the tool.
If it is determined the worker is not an employee, then payments can continue to be paid gross. However, it’s worth noting that if the worker disagrees with the CEST tool result, the end client is required to have a dispute resolution procedure, which allows the worker to challenge the assessment.
You should make sure that you can demonstrate that you have taken reasonable care in coming to your conclusion. HMRC are very clear that failure to take reasonable care will mean that the company could be subjected to significant penalties and even the underpaid income tax and NIC.
Reasonable care would include the following:-
It is worth noting that, due to Covid-19, HMRC have announced that they will be lenient in respect of penalties for the first 12 months. However, despite these temporary measures, businesses will still need to take reasonable care to apply the off-payroll working rules correctly in order to be treated sympathetically by HMRC.
It is expected that the businesses who engage contractors follow the steps below for each engagement. Failure to comply with this could expose the business to not only penalties and interest, but also the underpaid income tax and NIC.
HMRC has some helpful guidance and gives specific information on areas such as vehicle and other costs, which workers might feel are at odds with their previous understanding of the rules.
If you have any questions then please do get in touch as we would be delighted to help