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What is IR35 and how do the changes affect you?

Author: Kate Ford, solicitor with Rudlings Wakelam

IR35 was introduced in 2000 and is designed to reduce tax avoidance by contractors who are ‘disguised employees’.

These are individuals who work in the same way as full-time employees but invoice for any work via a limited company, partnership or other separate legal entity in order to make their services as tax efficient as they can.

Things are changing

New rules are coming into place from 6 April 2020, which require medium and large clients to align with public sector authorities and those clients will then be responsible for deciding whether the rules apply to a particular contract.

The onus has therefore shifted from the individual providing the work to assess the status, to the client receiving the services to determine the status.

Medium or large clients will be determined by the following factors and will be considered medium or large if they satisfy two of the following:

  • Annual turnover of more than £10.2 million;
  • Balance sheet total (gross assets) of more than £5.1 million;
  • More than 50 employees.

Should a client satisfy the test for medium or large capacity, they will need to decide the employment status of a worker and pass their decisions, together with their reasoning, to the individual or the agency that provided the individual on every single occasion.

This will be the case for every engagement of the intermediary, even if the client has engaged the worker for a second time but in relation to a different service. As the responsibility has now shifted to the client, it is important to carry out such determinations with due care and consideration and it may be beneficial to appoint independent advice from specialist who are experienced in this area.

This is a significant change for recruiters as they will now be faced with potentially substantial tax bills if the end client has determined the incorrect IR35 outcome. An added responsibility has now been shifted to recruiters and agencies to properly advise the end clients as to what decision should be reached in respect of the workers they are providing.

There is some respite for those clients who would fall within the definition of ‘small’. If a client does not fall within the criteria above, then the responsibility of determining IR35 applicability remains with the worker, or their agents.

IR35 checklist

Some factors to consider if you are unsure that your workers are definitely outside the scope of IR35 are as follows:

  1. Other workers

One important factor when considering if an appointment falls outside the scope of IR35 is that the client permit a substitute, sub-contractor or other worker to complete the work on the worker’s behalf, essentially that the individual can appoint a locum in the worker’s place. If the individual is the only person that can undertake and complete the work for the client then this will be a significant indicator of an employment relationship and will cause the parties to fall within the scope of IP35.

  1. Continuation of work and exclusivity

Self-employed individuals usually work on a project to project basis, with an understanding that the relationship will end once the contract has ended and the work has been completed, the clients are also not obligated to continue to offer work to the individual once the matter is completed. For example, if a client is required to find an individual work, and the worker is obligated to undertake it, this would be indicative of an employment relationship rather than a service contract. Importantly, if the contract or agreement states that the worker can only work for them, they this is also an indicator of an employment relationship. Generally, sub-contractors will have multiple jobs ongoing and only in an employment setting will the individual or employee be required to supply work for one client.

  1. Authority

Individuals who have control and independence in how work is carried out and completed will fall outside of IR35. If an agreement establishes strict working patterns and explicit input detailing how work is to be completed then this may be considered as within the scope of IR35. Another factor is that should the individual provide additional tasks and work for the client that has not been provided for in the contract or agreement then this will also be within IR35.

  1. Equipment

Providing their own equipment or supplies is a very good indicator of self-employed status, as otherwise HMRC could view the reliance and supply of tools, supplies and facilities from the client as an employment relationship.

  1. The client’s business

When a worker becomes particularly involved or a significant feature in the business’ structure, for example when the worker manages other employees of the business or has an input on areas of the business that don’t necessarily concern the services that they have been contracted to provide, this is indicative of an employment relationship and therefore within the IR35 scope.

Individuals falling within IR35 will be expected to pay National Insurance and PAYE, whereas those falling outside of the scope of IR35 would imply invoice for their work, or any other payment arrangement that had been agreed between the parties and set out such terms in the contract for services. Should someone who actually falls within IR35 be carrying out their business through an intermediary, then HMRC will deduct any tax or National Insurance which should have been paid already and expect ongoing payments to be made in accordance with employment regulations.

How employers should prepare 

Some steps that will be helpful preparation for the upcoming changes due to take effect on 6 April 2020 are as follows:

  • Carry out a review. Assess each member of your workforce individually, identify those who are definitely employees and compare their work patterns, expectations and arrangements with those that you believe to be self-employed. It is important to identify the individuals that will need further review to ensure that you are compliant.
  • HMRC’s Check Employment Status for Tax (CEST) service is a useful to assist you when determining whether a worker falls within the scope of IR35 or not. This will not necessarily be definitive but it is helpful guidance.
  • Speak directly with your self-employed workers and review what their stance is in respect of their engagement.
  • Keep an eye on other businesses in your industry and speak with professionals who have experience to identify what decisions others are making in respect of the IR35 judgements.
  • Start integrating processes and procedures to determine a new employee or contractor’s status. Assess your contracts and see if they should be updated to avoid any uncertainty of the rules and establish tests that your business can use when initially engaging with an individual. It is also important to consider the new obligations that you will inherit should any individuals be considered as within IR35 and new contracts, terms and payment arrangements will have to be negotiated.

How workers should prepare 

If you are a worker providing services through your personal service company, you too will need to prepare for the change in rules in advance of April 2020 by:

  • Assessing your own position and taking a view as to whether the client should consider you as within or outside the IR35 rules. If the client believes you are either self-employed or an employee and you feel that they are incorrect with their status, you will need to write to the client with your reasons for disagreeing, and the client will then have 45 days in which to respond.
  • Being ready for potential fee negotiations. Under the new rules, the fee payer will now have a liability to employers’ NICs, which represents an additional cost to them. While they cannot lawfully deduct this from a fee that has already been agreed, they may try to renegotiate terms to reduce the rate for the job.

Rudlings Wakelam have worked alongside CODE, providing support to the business and CODE members for over ten years.

Kate Ford is a solicitor with Rudlings Wakelam, for the commercial and employment departments alongside Steven McGrath and Jonathan Cobbold. Kate and Rudlings provide advice in relation to all business, property and employment related aspects of any business. Kate and Rudlings specialise in the healthcare industry, dealing with many dental practices, GPs, veterinary practices and so on. They are able to provide bespoke and tailored legal advice to all healthcare professionals and practices.