Income tax rarely gets anyone very enthused but IR35 employment tax law will change this April and there could be implications for both businesses and contractors.
No-one wants to fall foul of tax law or prompt an HMRC investigation, so we’ve compiled some information and tips for what to do next, whether you’re the business owner or the contractor providing your services.
From 6 April 2020, the IR35 regulations will apply to private sector businesses as well as the public sector. As a business owner this could affect the way you pay your contractors, freelancers or anyone paid via a Public Service Company (or intermediary). Correspondingly, if you work as a contractor then there could be action for you to ensure that you are reporting and paying your tax compliantly.
This new legislation extends the existing regulations which have applied in the public sector since 2016 and builds on the earlier regulations which have been around for 20 years. IR35 was originally introduced because the Government believed some contractors were providing their services through a limited company or a partnership as a means of avoiding tax and national insurance contributions.
Historically, the perception has been that engaging contractors was a ‘cheaper’ or less ‘risky’ way to use staff. Other employment law such as notice periods, consultation or redundancy pay normally doesn’t apply to contractors so frequently it is a more responsive way of using resources. Across the board, the Government is putting “off payroll workers” in the spotlight with this new taxation approach and we continue to see the principles of the “gig economy” be debated and traditional employment models being challenged.
Does IR35 apply to me?
Smaller businesses are still exempt if they meet two or more of the following criteria:
- Annual turnover is no more than £10.2 million
- Balance sheet total is no more than £5.1 million
- No more than 50 employees.
The small business exemption does not apply to engagements that fall under public sector off-payroll working rules.
My business/client is not exempt from IR35. What happens next?
Medium and large business owners will be required to review the status of their existing contractors and any workers to ensure that they are paying tax appropriately. If these contractors are deemed to be employees by HMRC then arrangements will need to be made so that the requisite tax can be paid.
This may mean bringing contractors onto your payroll and treating them as employees with the associated contractual changes. It will become the liability of company to pay their income tax and National Insurance rather than the individual.
As a business owner, what information do I need for IR35?
If your business has people other than employees working for you then a quick audit of who works for you and in what way is a good starting point. Are they on your payroll? Are they supplied by an agency? Include anyone who invoices you as a freelancer, sole trader or via an intermediary company such as their own limited company. You’ll need to know more about the kind of work they have been undertaking (or will be undertaking). HMRC wish to ascertain if a company is being used in a genuine ‘business to business’ sense which would mean its not just about one person providing a service that only that person could deliver.
For example, if you have a freelancer who, to all intents and purposes, is covering a job role in your company, then it is possible they would be seen as an employee rather than a freelancer/contractor. This type of ‘disguised’ employment may be viewed as tax avoidance so action will need to be taken to ensure compliance.
The HMRC website provides an online questionnaire/test which helps you determine this. Answering these questions start to give you an indication of the criteria that establish whether someone should be treated as an employee or not
I’m a contractor. Will my clients contact me about IR35?
If you are a contractor then you should also review each contract you have with every client and ask them to provide a Status Determination Statement (SDS). This SDS document is new to the IR35 process overall and it’s the responsibility of the client to provide this – however you need to ensure that this is in place and that you agree with the status.
If you are working through a Public Service Company you are likely to want to review your fees as well, because all business expenses (such as accountancy fees) will come out of post-taxed money. This is one reason why you should consider whether it is time to go in-house. The tax advantages of working through a PSC are gradually being removed, and the benefits of being an employee may outweigh the benefits of being a contractor. As always, it is best to start preparing sooner rather than later to avoid any last-minute hiccups and associated stress.
When does all this need to be in place?
The new legislation comes into effect on 6 April 2020 and the understanding is that it should be applied to all work invoiced for after this date – so it may include work delivered earlier but invoiced in April.
If you found this useful, please share: