Many contractors will be disappointed to hear that changes to IR35 in the private sector are going ahead from 6 April 2020.
However, it is going ahead, and for many thousands of businesses that have waited for the Budget, hanging on in there in the hope that it might get delayed, they now need to take action.
So what is IR35?
In brief, IR35 has been around since the year 2000 and is designed to combat false self-employment. Is it for workers operating through intermediaries such as Limited Companies and Partnerships. There are separate rules for sole traders.
The legislation was never implemented with much success and in 2017 measures were introduced to the Public Sector to tackle this.
The change from 6 April 2020 to the private Sector is an extension of the Public Sector rules with a couple of amendments. What is important to understand is that this is not a change to the fundamental rules of IR35 and the related long-standing employment tests. It is a change to who bears the responsibility to make the assessment and ensure the correct amount of tax is collected.
The rules prior to 6 April 2020 mean the worker operating through their Limited Company has to self-assess if they fell inside of IR35. However, from 6 April 2020, it is the client engaging those services that needs to make this assessment, if they are medium or large in size.
Medium or large for these purposes means meeting two out of three of the following:
- Turnover of less than £10.2 million.
- Total balance sheet less than £5.1 million.
- Less than 50 employees
If they are medium or large, (and there are rules about becoming medium and large and being part of a group), they then take on the responsibility for making the IR35 determination of those contractors they engage operating through a Limited Company or Partnership and collecting the right amount of tax if they are also the feepayer. If they are not the feepayer then there are rules they must follow to pass on the determination to the feepayer together with an appeals process. If the end client is not medium or large the responsibility continues to remain with the worker themselves.
Where there are complex supply chains, agencies or other companies that sit between the workers company and the end client, you need to understand the chain, where you sit within it and your responsibilities.
The above is a very high-level overview of the rules and there is much more detail to consider when seeking advice.
To put the theory into practice and to allow you to understand where you may sit within the IR35, we summarise the three most common scenarios and considerations, but again this is by no means exhaustive given that each case will be different.
Are you a worker operating a small business through your own Limited Company?
Then you need to understand who you are providing services too. If they are medium or large businesses, you will shortly be faced with a determination as to whether they believe you fall within IR35. If the determination states you fall within IR35 what does that mean, there is an appeals process you can follow but if that determines that you fall within IR35 you will be put onto your clients payroll, you won’t get relief for your expenses against the income from this contract anymore, and you will not have the rights of an employee albeit you will be paying tax like one. In addition, you will need consider further rules if your client or fee payer are overseas and you may naturally want to negotiate your pay.
Are you a medium or large business?
Then you need to assess your workforce immediately. You have a responsibility to understand your workforce and make a determination of all of our contractors operating through Limited Companies and Partnerships, undertaking these determinations in the correct way. You have a legal obligation to ensure determinations reach the appropriate links in the chain and above all else you will need to know the financial impact this legislation is going to have on your businesses.
You may need to take stock of your business model, consider how you use contactors, decide who within your business will take on the responsibility of IR35 and have processes in place to demonstrate you are compliant. At the same time you may want to take a health check on your workforce to ensure you understand other rules i.e. could some of your work force qualify for workers’ rights and therefore increase their costs to you further and do you have sole traders not operating through a Limited Company, who are already your responsibility to determine their employment status.
You may not be medium or large but be close to the number of employees threshold and this could be breached if sole traders after being assessed, turn out to be employees; don’t get caught out, if you are close to the thresholds, ensure you have regular reviews.
Are you an agency or business that sits between the worker and the end client?
You need to ensure you are fully aware of the contracts in place, ensure you are certain whether you are the fee payer only, providing labor to the end client or whether the worker has a contract with you and you are providing services, and therefore if you are medium or large you may take on the responsibility for determining the workers IR35 status. In addition, whether the end client may make a determination on your business if you are providing contracts as a service. In addition, if you have sole traders on your books are you aware of the agency legislation that is already in force and your obligations here.
These are a snapshot of where you may fall within the supply chain and the areas you will need to consider but it is crucial to take advice to ensure nothing is overlooked and your circumstances are carefully reviewed.
For more information, our tax team have significant practical experience in this area and whether you are the worker, agency or end client, we can help you get clarity on your position and put measures in place.