Did you know that there are around 2 million professionals who work on a self-employed basis? Of that 2 million, 1.77 million are contracting on a full-time basis, bringing in a staggering £119 billion to the UK economy.
Contractors and client companies alike commonly spend time ensuring that they do not fall foul of the off-payroll working rules, otherwise known as IR35.
As of next year, these rules are set to change in such a way that will likely result in the IR35 rules becoming more difficult to avoid.
Businesses and consultants alike are advised to get up to speed on the changes, which are due to come into effect in April 2020, to ensure they are not in breach of tax legislation.
Just because someone is labelled an independent contractor doesn’t prove that they are one. You have to consider the facts of the relationship and overall picture to decide whether such a relationship exists.
These types of arrangements have come under increasing scrutiny by the courts and Her Majesty’s Revenue and Customs (HMRC) – in the context of the ‘intermediaries’ legislation or the Income Tax (Earnings and Pensions) Act, 2003 (or IR35 legislation).
This Act seeks to prevent disguised employment, which is where you engage independent contractors through a services company in order to avoid the resultant tax and employment duties, when they are, in effect, ‘employees’.
Surprisingly, HMRC has lost approximately 50% of IR35 tax cases that it has brought against contractors so you must be careful to avoid falling within their scope.
You need to be prepared for drastic changes to the way you engage contractors and ask for legal advice to avoid the risks and protect your business.
What is IR35?
The Intermediaries Legislation, or IR35, has been around since 2000. The aim of the legislation is to remove the tax advantages that come from individuals providing services via a limited company, who are actually ‘disguised employees’ working for a client company.
Who will these changes impact?
From April 2020, there will be changes to the IR35 rules for medium and large businesses. Small businesses are not impacted by these changes.
You are a small business if:
- Your annual turnover is not more than £10.2 million;
- Your balance sheet total is not more than £5.1 million; and
- Your number of employees is not more than 50
If a business does not satisfy these elements, it will be deemed medium or large, and will be affected by the IR35 changes.
So what’s changing?
In terms of the current rules, liability for ensuring compliance with IR35 is on the contractor providing the services. As of 6 April next year, this liability will lie with the client company instead.
If HMRC decides that the company has not taken ‘reasonable care’ when determining a contractor’s IR35 status, the liability will be transferred to that company, irrespective of whether or not that company actually pays the contractor’s fees.
To determine whether a contractor is ‘inside IR35’ (i.e. more of an employee than an independent service provider), the following criteria must be considered:
- Is the contractor subject to the company’s control?
- Is there a right of substitution (i.e. can the contractor provide someone else in his or her place)?
- Is the contractor integrated into the company’s business, or are they truly carrying on business on their own account?
- Is there a mutuality of obligation between the parties?
This is the same set of criteria under the current rules, however, the burden for making this determination now rests with the client company, and not the contractor.
If a contractor is deemed to be ‘inside IR35’, then the client must deduct employee’s and employer’s national insurance, as well as income tax, from the contractor’s pay.
What steps should I be taking now?
If your business falls within the definition of medium or large, or is likely to by April 2020, we advise you to start work now to determine whether your contractors could fall within IR35. Some steps you should be taking now include:
- Put in place robust processes with set criteria to determine whether your contractors are more like employees than independent contractors
- Prepare systems for regularly assessing contractors’ employment status
- Train your staff to make IR35 determinations and regular assessments
- Budget for extra costs, in case your contractors do fall within IR35
- Ensure properly drafted contracts are in place which properly reflect your contractors’ responsibilities and employment status
Bear in mind that these rules will not just impact the contracting company, but also other companies down the supply chain. For instance, if company (X) employs contractor (Y) to provide services to X’s client (Z), Z could also be responsible for X not making the correct determination about Y. This could impose a significant burden on your company and as well as your clients, and expose other companies in the supply chain to tax risks in circumstances beyond their control.
It is therefore imperative to begin reviewing your contractors’ status, as well as the actual terms of their contracts, now to ensure you are prepared for the new rules coming into place in April of next year.
If you are an employer and you need advice on IR35, our employment law solicitors can help.
Call us on 020 7148 1066 or email us at [email protected] and we’ll get back to you within 2 working hours. We’ll save you money by providing a free 15 minute initial consultation with one of our qualified and regulated employment lawyers and a fixed price quote. Using legal technology, we make sure you can meet all your legal needs at half the normal cost or less, without any compromise in quality or assurance.
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The author of this blog post is Barbara Jamieson.
Barbara Jamieson is qualified in Scotland, New York and California, and has worked at top Scottish law firms Maclay Murray and Spens LLP and Brodies LLP. Barbara also spent three years working in-house at investment management firm Martin Currie, advising on financial services and commercial contracts.