Ever heard of IR35? A job for your accountant or legal team, perhaps. But don’t shrug off your responsibilities.
If you’re working out of an intermediary (limited company) IR35 is likely to fall onto your ‘to do’ list in some shape or form. Here’s what you need to know…
What is IR35?
IR35 has existed for some time. Introduced by HMRC in April 2000, IR35 is a piece of legislation designed to tackle tax avoidance by contractors. It aims to do so by assessing whether an individual is a genuine contractor used by an organisation or is instead what is known as a ‘disguised employee’ for tax purposes.
The rules change slightly on 6 April 2021 and are applied differently. From this date, technically all public authorities, medium and large sized clients, will be responsible for deciding the employment status of workers (which also means contractors and consultants). A company qualifies for the small company exemption, if it meets two or more of the following criteria:
- Turnover – not more than £10.2 million;
- Balance sheet total – not more than 5.1 million; and/or
- Number of employees – no more than 50.
Whatever you call yourself, you should be certain of whether you or your workers’ status falls in or outside of IR35.
What do the changes actually mean?
If your worker provides services to a public sector client, or a medium or large-sized private sector client, they:
- Should get an employment status determination from the client, as well as the reasons behind that determination
- Will be able to dispute the determination given to them if they disagree with it
Different rules apply if your worker:
- Does not get an employment status determination from the client
- Provides services to small clients in the private sector
Now, you will also need to communicate your ‘determination’ (i.e. your decision) using a Status Determination Statement or SDS. This must be communicated to the contractor and/or organisation you’re working with and set out your conclusions and the reasons you have reached those conclusions.
If your worker does not get an employment status determination
The rules are not changing for these clients If your worker is providing services to a small-sized client in the private sector.
If the client confirms it is a small-sized organisation, you as the intermediary (usually a limited company) will be responsible for determining your worker’s status to see if the off-payroll working rules apply.
What to consider when conducting a determination
It’s really important that your worker’s arrangement is documented. Consider the following key areas:
- How much freedom does the worker have over how they complete the assigned work.
- Are they required to start and finish at a certain time, or carry out the work on specific days. In the eyes of the law, their role would likely be seen as that of an employee rather than a contractor.
- You should also look for a mutuality of obligation clause in any contract you decide to undertake. This means that your workers should be free to choose work, so if you offer work, are they obliged to take that work – this can suggest a contract of employment rather than a client and contractor arrangement.
- Can they work on a project-by-project basis?
- Are they prohibited from working with other clients?
- Do they use their own resources and materials?
The important thing is to have a document trail of your conclusions including:
- Detailed records of your workers’ employment status determinations, including the reasons for the determination and any fees paid
- Have processes in place to deal with any disagreements that arise from your determination(s)
- Confirm the size of your organisation if asked by the person or organisation you contract with, or the worker
If you are taking on contractors, the responsibility to deduct tax and National Insurance rests on you until you tell the contractor otherwise.
For more details, please join our free IR35 webinar on Wednesday 17 March at 12 noon (a recording will be available).
360 Law Group’s Erika Moralez-Perez will be joined by Mark Taylor from Duncan & Toplis / Kreston International to provide an insight into the implications of the new “off-payroll working rules” under IR35. The 45-minute webinar and Q&A will discuss what it means for your business, what you need to do and the financial implications of the legislation.
By Erika Moralez-Perez, Corporate Solicitor at 360 Law Group