From 6 April 2021, businesses who have self-employed contractors working for them through a personal service company will be responsible for determining the correct tax status for those individuals and ensuring that tax is paid.
What is IR35?
The rules are intended to combat tax avoidance from individuals working on a self-employed basis through an intermediary, but who should be classed as an employee.
Until now it has been the contractor’s responsibility to pay tax depending on their correct employment status, but this meant that many continued to class themselves as self-employed and pay less tax.
Now the rules have changed so that it is the business engaging the services of the contractor who is responsible for assessing their correct employment status and ensuring that the right tax is paid in accordance with that status.
Who do the Rules Apply to?
They only apply to medium and large sized organisations.
For small organisations the rules stay exactly the same as before so that it remains the contractor’s responsibility to assess their own employment status and pay tax in accordance with it. To be classed as a small company at least two of the following criteria must be met:
- The annual turnover is not more than £10.2 million
- The balance sheet total is not more than £5.1 million; and/or
- There are not more than 50 employees
Medium and large organisations must assess the true employment status of contractors working for them through an intermediary, such as a personal service company. The rules do not apply to those working on a purely self-employed basis invoicing a client directly. `
HMRC has said that they intend to take a ‘light touch’ approach to the rules in the first 12 months with enforcement action being focused on deliberate avoidance or criminal behaviour. This means that organisations have some breathing space but now really is the time to get to grips with the rules and get your house in order.
What Should You be Doing? – Medium and Large Sized Organisations
If you are a medium or large sized organisation you should firstly look at all of the self-employed contractors working for you and identify those working through an intermediary, like their own limited company.
You then need to assess whether they should be classed as self-employed or if they are really working like an employee. HMRC has developed the ‘Check Employment Status for Tax’ (CEST) tool which you can use for this.
You need to inform the contractor of the decision you have reached about their employment status and ensure that tax is paid in accordance with it. So, if you have decided that they should properly be classed as an employee then you need to deduct tax and national insurance from any monies paid to them. You will also need to pay employer national insurance contributions, pension contributions and the apprenticeship levy, if applicable.
If you have assessed that they are genuinely self employed then you can continue paying them directly as before and they will remain responsible for accounting for their own tax.
What Should You Be Doing? – Small Organisations
If you are a small organisation, then the changes in the rules do not apply to you but if the work you do is part of a larger supply chain then the clients you are working for might ask questions about the contractors working for you as the tax liability could pass up the chain to them.
You should also let your contractors know if you are a small organisation so there can be no confusion about who will be undertaking the tax assessment, and that this should still be done by them.
How Can I Avoid IR35?
You cannot completely avoid IR35 but to limit the risk of it applying you can ensure that you have robust agreements in place with your contractors which are up to date and reflect the reality of the working arrangements.
Including clauses that point to a genuinely self-employed relationship and which would not apply to an employment contract is key.
For example, including the right for the contractor to send a substitute to do the work in their place and the requirement for them to provide their own equipment would be more likely to point to them being self employed than an employee.
Similarly, you should avoid including provisions that would normally only apply to an employee such as providing benefits like gym membership or private medical cover as well as paid holiday or sick pay.
For further advice on the new IR35 rules and what you should be doing to comply with them, please contact us on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.