Now this isn’t the most exciting of topics but it’s a really important one for private sector organisations in the UK – a recent article I read suggested 2 in 3 companies are not yet prepared for IR35.
IR35 (off-payroll working) is shorthand for UK tax legislation that has been created to identify contractual workers and businesses, which are not paying the appropriate level of tax by working as a “disguised employee”. The responsibility lies now with the fee payer as opposed to the contractual worker so an organisation must be educated to ensure they don’t fall foul and face fines (or equally they don’t lose people / may not be able to attract people by not being able to offer the right type of contract for an individual). Recruitment agencies are also in the fee payer chain so a good one should be able to offer advice and solutions.
IR35 was implemented into the Public Sector in 2017 and was due to be implemented into the Private Sector in April 2020 but was pushed back a year due to COVID-19 – the government has recently confirmed that it will not be pushed back again so, if you haven’t already, you need to be preparing for it now.
What is a “disguised employee”?
- It’s a contractual worker who fills a permanent position in an organisation via a Professional Service Company (PSC) and doesn’t pay the same level of income tax and NI contributions that a permanent worker would.
Who decides whether the off-payroll working rules apply to an individual?
- This is more commonly known as inside (rules do apply) or outside (rules don’t apply) IR35 and the responsibility for determining whether the rules apply will move to the organisation receiving a contractual worker’s services.
How do I decide if the off-payroll working rules apply?
- You need to assess each contractual worker individually and you should not make a blanket decision that, for example, all your contractual workers are inside. HMRC has said “reasonable care” must be taking when setting the status of a contractual worker.
- Some of the questions you need to consider are (and these are not exhaustive)
- To what, if any extent, do you as the end client supervise, direct or control how the work is performed?
- Is there the right to substitution under which the PSC can provide a substitute to carry out the work?
- Is there mutuality of obligation? Does the PSC have to accept the work offered by the end client (directly or indirectly)?
- The method in which the payment is made for the services rendered. Hourly? Weekly? Milestone based?
- Does the PSC / individual provide / use their own equipment and material?
- Is the PSC / individual subject to process and procedure expected of your employees?
- This link on the gov.uk website may be useful for helping you determine if somebody is inside or outside – https://www.gov.uk/guidance/check-employment-status-for-tax. Please note that this link does take a subjective approach and is not as objective as an independent review as there are many considerations it does not take into account.
What else do I need to do as somebody who hires contractual workers?
- Know your business and workforce make up
- Know and understand your full supply chain
- Educate your business and its stakeholders
- Interrogate your contractor relationships
- Ensure administration is comprehensive and be able to demonstrate this to HMRC
What might determining a current contractual worker is inside mean?
- The contractual worker may decide to look for a new role elsewhere that would classify them as outside
- They may request an increase in rate to offset the additional income tax and NI contributions they are paying
- They may appeal your decision
- They may accept your decision and continue as normal
Can a PSC / contractual worker challenge an IR35 decision?
- Yes, and if they do you have 45 days to respond. You must inform them that the decision is correct or change your decision (and provide reasoning for your decision)
To summarise – if you / your organisation has contractual workers and have not yet prepared for IR35 please start doing so now. If you’d like more information or to discuss further please contact me on firstname.lastname@example.org