Changes to IR35 legislation applying to the private sector will take effect from April 2020
IR35 is reforming for the private sector, affected businesses are now preparing for legislation change – are you ready? Over the last few years, the Government has continued to focus their efforts to tackle what they perceive as 'tax avoidance' within the practice of engaging contractors who operate via their own limited companies.
And while no one would argue against the need for compliant engagements, the by-products of the latest potential reforms are increased responsibilities for clients who engage workers using this operating model.
The IR35 legislation was introduced in 2000 to tackle concerns about businesses
hiring individuals as consultants through Limited companies, rather than
employees, and the resulting unpaid taxes (often referred to as ‘disguised
Any individual 'inside IR35' (so deemed to be operating like an employee, rather than a consultant) must pay tax and NICs, usually by using an umbrella service or operating a PAYE payroll within a personal service company (PSC).
If workers are providing a genuinely business-to-business service, they are able to operate ‘outside’ of IR35 and therefore PAYE tax will not be due on their earnings.
From April 2020 it will be the client rather than the consultant who will be responsible for assessing if IR35 applies and for ensuring the proper tax is paid where it does.
HMRC are responsible for enforcing the IR35 rules and do so via employment status investigations and decisions. Taxpayers can challenge these decisions through the Tax Tribunal.
While HMRC has not chosen to pursue many IR35 investigations with individual Limited Companies over the past few years, there have been a couple of high-profile examples which have recently received a lot of media attention, including BBC television presenters
The HMRC has said that it cannot effectively enforce IR35 where responsibility for assessment of status and payment of the relevant tax lies with the individual contractor. It has already transferred this liability to the client in the Public Sector and this will be extended to medium and large private companies from April 2020. The exact rules are currently being finalised following a consultation and are expected to be published this suffer.
If an assignment is inside of IR35 and the entity responsible for paying the worker (either the hirer or the agency involved) does not deduct NI and applicable tax before paying the worker, then that body can be liable for the unpaid tax and NIC payments. It is, therefore, vital that all parties in the supply chain understand the risks and take steps to comply with the new taxation standard
While the change will be challenging, there is also an opportunity to increase compliance and still allow businesses to benefit from the hugely skilled and talented flexible contractor population within the UK.
Companies should take the opportunity between now and then to assess the current nature of their contractor relationships and, if necessary, take steps to ensure they are genuine business to business relationships which would fall outside of IR35. This would include reviewing all contractual documentation.
"I want to redecorate a room, and I need to hire a contractor to do so. When I hire this worker, I specify that I want the room to be painted blue and agree an hourly rate with them. I tell the worker that I want them to start the job by painting the top right-hand corner first and to continue painting in a clockwise direction. I also say I want all the skirting boards and window frames to be protected with masking tape. I tell the worker that I will be back to check on the progress every day. I provide the paint, the brushes, ladders and all the other tools needed for the job and also tell them to complete some additional work which wasn’t agreed to begin with. If the worker isn't available for some reason, they are not allowed to send a substitute decorator in their place."
"I needed to paint a room, and so I hired a contractor to do so. When I hired this
worker, I specified that I wanted to paint the room red and that there was a
deadline for the job to be completed; we agreed a price for the job. The worker
provided all their own equipment, used their skills and experience to determine
how to approach and execute the project. If they were not available, they could
send a suitably qualified and experienced substitute to fulfil the contract on their
behalf. When I asked for them to complete some additional work, we agreed a
separate fee for this to be completed."
In the above scenario, there is a good chance that Contractor 1 would be inside of IR35 – they are subject to supervision and control and do not have their own equipment. Also, by being paid an hourly rate there is no financial risk.
Managing subcontractors can be a headache for many organisations. However, they are viewed as a flexible source of expertise and labour, available as and when your business requires. That flexibility comes at a price: less control. It is, therefore, vital that you have in place effective processes for assessing the competence of your subcontractors, backed up with robust formal agreements.
You should also have a process to pre-qualify your subcontractors so you can demonstrate they are competent and qualified to be carrying out work on site. This can also mitigate any issues related to accidents, standard of work and deductions from invoices. Here at EL Direct Ltd we have a solution for this called our First For Contractors Package; this is popular throughout industry to manage subcontractors, consultants and suppliers.
The key features of the First for Contractors package are:
We can offer a free online demonstration off the First for Contractors pack. Please give us a call on 0114 241 7092 or email email@example.com.
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