In the current business landscape, there are a few things that are causing some uncertainty, and one of them is the laws surrounding off-payroll working, usually known as IR35. If you use a number of freelance and non-permanent workers, it can feel like a nightmare to work out, but do not fret, here is a guide to the basics of how IR35 will change on 6 April 2020.
NOTE: This article should not be treated as legal or financial advice. If you require assistance for complicated situations where IR35 may apply, please speak to a financial advisor. Proman takes no responsibility for any action or inaction you take as a result of this article.
What is IR35?
IR35 is a UK legislation designed around stopping tax avoidance for what it terms “disguised employees”, and ensures they are paying the same tax as a standard employee.
Disguised employment is essentially people who work for a business who would be treated as employees if they were fully employed but instead are paid through an intermediary, such as a company owned by the worker (or an agency). What it was possible to do before IR35 was to pay a worker through this intermediary, then either pay for expenses directly as a company or take the money as dividends, which are not taxed on as much as employee wages.
It also stopped a situation where some freelance workers essentially worked as employees on weekly contracts that were renewed, described as the “Friday to Monday” scenario, and devised what it described as a “hypothetical contract” to ensure they paid an appropriate amount of tax.
Despite it being a major news story now, IR35 has existed since 2000, with a number of adjustments made to the law and its enforcement.
Since 2000? Why does it matter now?
It matters because the rules have expanded further, to include not only large public sector employers but also medium to large-sized private sector organisations. Previously it was the job of the intermediary to determine whether the person that worked on a job was an employee or not for tax reasons (and therefore was responsible for paying the appropriate amount of tax, NI contributions or fines for non-compliance).
Now, however, employers have the responsibility for ensuring that the people they pay to work for them are categorised correctly and the correct amount of tax is charged from them, with all the information available and provided to each worker for each contract.
The Three Pillars of IR35
In order to create a “hypothetical contract” and determine whether the work you undertake as part of a personal services company counts as employment, HMRC undertake a number of tests which can be boiled down to three major “pillars” or tests of IR35 eligibility. These are tests that are intended to demonstrate whether someone working for the company is freely providing a service or effectively operates as an employee without the agency of traditional freelancing roles.
- Substitution – Substitution is all about who does the work requested. A contractor has the right to substitute himself for someone else who has the same skills and experience, and the task required must allow for this in order to qualify as contract work. If you are obligated to personally complete the task, it is employment.
- Direction and Control - Direction and control is about how work is completed, and how much autonomy a contractor has over the work they provide a client. These include the location the work is undertaken (if the job can be completed remotely), when it is completed, using what means and what tools, and so on. Whilst a lot of contract work will have some control on the client’s side as to this (limiting the work to a mutually agreed timeframe, deadlines etc) if most of the work is deemed to be under the control of the employer the contractor will be seen as an employee.
- Mutuality of Obligation – This is the most important one, as well as the most disputed element of IR35. Mutuality of Obligation (or MOO) is whether a contractor is obligated to provide his services. A contractor should have the right to choose what work they take on and if that isn’t completely the case, then it is more likely that they will be seen as a disguised employee. Conversely, if there is an obligation to pay to retain a contractor even if there is no work for them to do, that is also something that may be a symbol of disguised employment.
What do I need to do?
If you are a small business, nothing changes. A small business is one that has less than 50 employees, has a balance sheet total less than £5.1 million per year and a turnover of less than £10.2 million per year. The intermediary will still handle the contract and make sure the worker is taxed appropriately for the work they do, deducting the national insurance and other tax contributions from their pay.
If you are a medium to large business, then you will be as of 6th April 2020 responsible for determining the employment status of everyone who works for you but is not employed by you. Gov.UK have a very useful tool for helping with this, available here.
If tax needs to be paid, what you need to do is calculate the deductions (National Insurance etc) and send the pay and deductions figures to the intermediary, as you would a standard employee on your payroll. You must also send the reasons you came to those figures. The worker and their intermediary then have the right to query or disagree with your figures. You then have 45 days to respond, otherwise, you will be responsible for paying tax and national insurance for the worker, as you would a typical employee.
How can Proman help?
Proman are experts in recruitment and have decades of experience making it as easy as possible for our clients. We have our own dedicated payroll systems and already take IR35 and other similar legislation into account when working with our partners. We have always collected and paid tax within IR35 and this will not change with the new legislation.