IR35 Guide: What employers need to know
If you’re a business that hires or is thinking about hiring a contractor to do some work for your company, chances are you’ll have heard the term ‘IR35’.
If you haven’t, or you just need more information, don’t worry – this article will help get you up to speed with what your obligations are as a business that uses contractors, and what you need to do to prepare for the upcoming changes.
IR35, or the ‘off-payroll rules’, is a piece of tax legislation set out by the UK government to combat tax avoidance by contractors and the companies that hire them.
IR35 applies when a contractor operates through their own PSC (Personal Service Company) or an intermediary (such as another limited company, a partnership or individual) and their role is essentially that of an employee rather than a true contractor.
These “disguised employees” should be paying income tax and National Insurance, and their employer should be making National Insurance contributions on their behalf.
While the classification of those operating through PSCs has previously been down to the individuals themselves, recent IR35 changes have meant that the responsibility has shifted to the companies that hire them.
That’s why if you use contractors or freelancers within your business, you need to make sure you understand and are following the regulations
The changes to IR35 rules will come into force on 6 April 2021. The date was originally April 2020, but the government delayed the reforms in order to give businesses more time to prepare in light of the COVID-19 pandemic.
If your business is in the public sector, it’s your responsibility to classify the employment status of those who work for you. However, if you’re in the private sector, it’s still the intermediary’s responsibility to do this.
All public sector businesses and medium and large private sector businesses will be responsible for classifying employment status of those who work for them.
If a small private sector client hires a contractor, it will be the intermediary who decides if the IR35 rules apply.
It’s a great idea to get ahead of the changes in April and make sure your business will be equipped to cope with IR35. This will give you peace of mind that you’re following the regulations correctly and aren’t at risk of being penalised by HMRC.
The first and most important thing you need to do is to take a look at the assignments and responsibilities of your contractors and ensure that everyone who works for you is correctly classified. The documents might not be clear enough, or the relationship might have evolved since they were created, so you should check that the contracts reflect whether an individual is working as a true contractor or as a “disguised employee”
You should do this for each new contract that is drawn up regardless of whether the individual has worked for you before, as IR35 works on a contract-by-contract basis.
The main factors that determine the difference between an employee and a contractor are:
In most cases where professional services are provided, it is important that a contractor can demonstrate a certain amount of autonomy in the way they undertake a project. Both the written contract and working practices must show that the client has no influence over how the contractor performs his/her services.
Control factors that may point towards an “inside IR35” status include:
– Indicating that the contractor will be supervised
– Including any “staff” benefits (including holiday or sick pay)
– Including start/end/break times
– Contractual clauses that specify any rights of control or supervision over the contractor
A genuine right of substitution has long been deemed to be a very important factor when demonstrating that a contractor’s assignment falls “outside IR35”. For a substitution to be considered valid, the right to supply a substitute must be a genuine one. This means that you must agree to it in practice, the contractor must pay for the substitute, and it should be an unfettered right. An unfettered right of substitution means that a client must accept a substitute if the initial contractor is unavailable
The contractor may take on a level of financial risk in undertaking the engagement. Contractors who don’t take any financial risk, for example, don’t have to rectify poor quality services at their own cost, are more likely to be “deemed employees” for tax purposes. Contractors taking the financial risk would also be expected to maintain appropriate insurances.
In simple terms a contractor has the right to refuse any work offered by the client, whereas an employee is obliged to accept any work given.
When you are individually determining the status of your contractors and some fall inside of IR35 then steps will need to be taken prior to April 6th to ensure PAYE Tax and NIC payments are made. There are a number of options, please do speak with us for advice.
You should also be aware of being approached by companies or individuals who offer to help you avoid the IR35 regulations. These schemes are illegal so should always be ignored.
1. Know the difference. Once you know the difference between an employee and a contractor, navigating IR35 will be a lot easier.
2. Review your contracts. Go through employment contracts for each individual to ensure the classification is clear and accurate.
3. Seek advice if you’re unsure. It’s always better to be safe than sorry. The Heat team are here to help if you have any questions.