IR35 – Important changes for large businesses who use contractors
What is IR35?
IR35 is tax legislation designed to combat tax avoidance by people who work in a similar way to full-time employees but bill for their services via their limited companies to make their business more tax efficient.
If you hire a contractor who declares they are ‘outside’ IR35, then as a hirer you do not need to deduct tax or NI from the fees you pay them. Their fees are simply a business expense to your company. Below, our Tax Partner Lisa Wilson explains IR35 for businesses and what is about to change:
Note that the changes do not apply to small businesses which are classed as such, if they have two or more of the following features:
- Turnover of £10.2m or less.
- £5.1m or less on its balance sheet.
- 50 employees or less.
- Who decides IR35 status?
Currently for the private sector, the person who is providing the services – i.e. the contractor is responsible for making that decision. If your contractor declares that they are ‘outside’ IR35, you do not need to treat them as an employee.
In a recent update HMRC have said it will only apply the rules retrospectively in cases of suspected fraud or criminal behaviour.
What is changing in April 2020?
From April 2020, the responsibility for deciding IR35 status will be extended to businesses in the private sector (it’s already in place in the public sector).
So, private sector employers hiring contractors will be responsible for determining their IR35 status and businesses should start preparing for this change as soon as possible.
What do businesses need to consider?
Some of the factors that HMRC will take into consideration when running an IR35 test are:
How is the contractor paid?
To stay outside of IR35, self-employed contract workers are usually paid on a project-by-project basis, which is normally when work reaches a specific milestone or comes to an end. The gov.uk website has a useful tool for helping determine their status – https://www.gov.uk/guidance/check-employment-status-for-tax.
The contractor must have complete control over how they complete their work for a contract to fall outside of IR35. If you set their working patterns or provide excessive input over how they complete their work, HMRC are more likely to view this as employment rather than contract work.
If you provide the contractor with equipment rather than them using their own, this could result in HMRC viewing them as an employee. A contract should make it clear that the contractor is obliged to use their own equipment, otherwise they are likely to be viewed as an employee by HMRC.
Contractor remains separate from your business
If you allow the contractor to become an integral part of your business, such as managing other employees, this indicates employee status as opposed to self-employment.
If you are using the same contractor over a long period of time, HMRC are likely to view this as an employee-employer relationship, meaning the contractor falls within IR35.
Checking employment status for tax (CEST)
If you are still unsure if a worker should be classed as employed or self-employed then we would recommend that you check the following gov.uk site – https://www.gov.uk/guidance/check-employment-status-for-tax
This service will give you the view of HM Revenue and Customs (HMRC) on whether:
- the intermediaries legislation (known as IR35) applies
- the off-payroll working in the public sector rules apply to a public sector engagement
- a worker should pay tax through PAYE for an engagement
What do you need to do if you decide that IR35 applies?
If you determine that IR35 rules do apply based on the above, you will need to need to deduct income tax and employee NICs and pay employer NICs to HMRC.
We recommend that you review all your current contracts to ascertain if they are fit for purpose from 1st October. We can assist with this, so please contact us if you’d like to discuss this or anything else mentioned above.
The information was correct at time of publishing but may now be out of date.