Update (18/03/2020):
On 17 March 2020 it was confirmed that the government’s proposed changes to the tax regime to the IR35 rules would be delayed until 6 April 2021.
The changes, which were designed to tackle tax avoidance of self-employed contractors who ought properly to be classed as employees, were due to come into force on 6 April 2020 but have been pushed back as part of the government’s measures to protect the economy from the coronavirus outbreak.
Steve Barclay, the Chief Secretary to the Treasury stated that the decision ‘was a deferral, not a cancellation’, and that the government remains committed to the proposed changes.
(04/03/2020)
From 6 April 2020, IR35 rules will apply to medium and large organisations in the private sector. This is a huge change affecting anyone who works as a self-employed contractor through their own limited company or any business who engages an individual working on such a basis. It is predicted to have serious adverse consequences for the economy.
What is IR35?
IR35 is a set of tax rules, so called after the name of the press release that introduced them.
The new rules are more properly described as the ‘off payroll working rules’ and are designed to prevent tax avoidance by individuals working on a self-employed basis through an intermediary company, and therefore not paying tax and national insurance, who if the intermediary company were not used would be deemed to be employees.
What does HMRC deem to be a medium or large organisation?
To be classed as a medium or large organisation, at least two of the following criteria must be met:
- Annual turnover of more than £10.2 million
- Balance sheet total of more than £5.1 million
- More than 50 employees
What about small companies?
Any organisations who do not meet the definition of medium or large set out above will not be caught by the new rules and the responsibility for determining employment status will continue to fall on the individual contractor and/or their intermediary company that they work through.
What do the new rules mean?
From 6 April 2020, if the end client engaging the individual to provide services is found to be medium or large then they will be responsible for deciding the employment status of the person they are engaging. HMRC has a tool which is intended to help organisations and individuals determine employment status.
The test looks at the actual reality of the situation rather than the contract between a self-employed contractor and their client, or the label that the parties give themselves.
It considers three main things:
- Control – How much control does the client have over how, when and where the individual completes the work? The less control, the more likely it will be found to be a genuine self-employed relationship rather than disguised employment.
- Substitution – Does the individual have to perform the work themselves or can they send a substitute in their place? If they can substitute this is more likely to be found to be genuine self-employment as an employee would not be allowed to send a substitute to work for them, their personal service is required.
- Mutuality of obligation – If the client offers work does the individual have to accept it? If so then it is much more likely to be seen to be an employment relationship rather than self-employed where the individual has control over what they choose to do.
If, applying the relevant employment tests, an individual is found to be an employee then the end client must provide notice of that determination to the individual performing the services and make deductions for any tax or national insurance owed to HMRC.
Because the new rules make it the responsibility of the organisation for deciding the correct tax rules that should apply, organisations are understandably becoming much more cautious about engaging self-employed contractors with some imposing a blanket rule not to engage individuals on such a basis going forward, because of the potential tax liability.
We can provide assistance with assessing employment status and advise on the contractual and practical arrangements that should be in place to offer best protection against a finding of deemed employment.
We have teamed up with ABG accountants to bring you a breakfast seminar on 25 March 2020 where we will be providing further information about the new rules and how to prepare for them. To find out more and book your place please click here.