You’ve probably heard the news about a Government crackdown on IR35. Delayed for a year, the rules come in tomorrow. But what does it really mean for employers? Big companies have been reviewing this for some time, but are all companies aware of the dos and don’ts of the new legislation? And do they realise the liability for a breach of rules will now shift from the contractor to the company itself?
Why the crackdown? The legislation has existed for almost two decades, however, until now, limited company contractors chose whether the IR35 rules applied to them and charged their clients accordingly. The problem is many decided they belonged “outside” IR35. This way they could reap the benefits of stable work, whilst taking advantage of the lower-than-PAYE corporate tax level through their limited company status. To give an idea of scale, HMRC estimated setting the status as “outside” the rules when they should have been “inside” has resulted in as much as £1.3bn in avoided taxes each year.
What sits inside vs outside? Now, here’s a question you need to get familiar with! “Inside” is HMRC’s term for individuals registered as limited companies that act like employees, providing a personal service, and should therefore pay employee PAYE and NI contributions. “Outside” operate as businesses, providing clients with contracted-out services. Even if they’re a one-person business, these companies operate independently from their clients and have far more control over when, where and how they work.
Assessing which is which? Every medium and large business (small companies are exempt) will be responsible for setting the tax status of its contractors. If it is deemed by HMRC to be incorrect, the company will now be held responsible for any missing taxes as well as penalties.
When evaluating whether someone is inside or outside IR35, HMRC will likely disregard the written contract and instead consider the contractor and business’s relationship to create a ‘notional contract’. They will consider three main factors.
Control: How much power does the business have over how, when and where the contractor completes the assignment? The more control, the more likely it is inside IR35.
Substitution: Can someone else complete the assignment or is it contractor-specific? You’re more likely to be inside IR35 if the latter applies.
Mutuality of obligation: Is the business obligated to provide work? Must the contractor accept it? If the answer is yes, then you’re probably operating inside IR35.
HMRC will also consider the type of contract, any financial risks for the contractor, their role in the organisation, and whether the company provides any equipment or corporate benefits.
It’s a bit of a minefield…so if in doubt, talk it through with your recruitment partner who will keep you on the right side of your new obligations … and the tax man!
Simone Lockhart is group commercial director for the Taranata Group
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