In the Autumn budget of 2018, it was announced that the IR35 would be implemented into the private sector from April 2020 in order to be in line with the public sector who have been working in this way since April 2017. The question is, what does that mean for your company and what do you need to do to ensure that you do not fall short of these rules.
What is IR35?
The IR35 refers to the anti-avoidance tax legislation designed to prevent people and companies from avoiding tax by describing themselves, or their workers, as self-employed or contractors or freelance when they are, to all intents and purposes, an employee of the company they’re doing contract work for. This is sometimes called “off pay-roll working,” and can apply if the individual is providing their services through an intermediary. An intermediary will usually be the individuals’ own personal service company, but could also be a partnership, a managed service company or an individual.
This is to ensure that companies are not hiding employees under the guise of self-employed workers, consultants or contractors to avoid paying tax and NI.
IR35 has been applicable to the public sector since 2017, and it has now been confirmed that as of April 2020, IR35 will be extended to certain businesses in the private sector.
Who does it affect?
Luckily for some, IR35 will only be initially introduced to medium and large businesses, not small. If your business can satisfy two of the three points below, you are not required to implement IR35, yet.
- Less than 50 employees
- Maximum of £5.1 on its balance sheet
- Turnover of less than £10.2m
If your business ticks at least 2 out of the 3 criteria above, you will be considered a small business for the purpose of IR35 and not strictly required to implement IR35 yet. However, bear in mind if you are a small business it is still worth familiarising yourself with IR35, so that you are prepared for if, and when, IR35 will be extended to cover small businesses.
What does the IR35 say?
In short, HMRC developed IR35 to try and crack down on Companies attempting to avoid paying tax by using an intermediary, known as a PSC to engage workers and therefore not being responsible for the payment for tax and NI.
Companies, on the whole, have two categories of individuals working for them. The first, being employees under an employment contract. The Company pays their remuneration, tax and NI through PAYE. These individuals are personally responsible to turn up to work and carry out what their job role requires.
The second category are self-employed workers and contractors. These are not employees of the Company and are often given a contract through a PSC to carry out a specific piece of work. These individuals are what IR35 is trying to tackle as all too often these workers, paid through the PSC are employees in all but name, with the Company being able to avoid paying the appropriate taxes. ‘But for’ the intermediary, they are employees and therefore, the Company should be paying their NI and tax.
What can you do between now until April 2020?
This time can now be used as an opportunity to review your current processes in terms of off-payroll workers to ensure that you have the correct practices in place for when your business will need to be IR35 compliant.
Some points to consider are:
- When did you last review your self-employed, off-payroll workers?
- We would suggest undertaking a further review in order to ascertain the true current status of your off-payroll workers; are they truly off-payroll, or are they employees in all but name? The government has designed a tool to help people check what category they fall into, you can view this by clicking here.
- Why did you initially seek off-payroll workers and is there still a commercial need to operate in this capacity? Is it reasonable to now employ them as employees or remove them completely?
Use this time as an opportunity to review your payroll systems to ensure that your system is robust enough and has the required capacity to apply PAYE if necessary to these workers.
What is the punishment for not complying?
The penalties which can be brought by HMRC are potentially significant to your company. Your company could face substantial fines for non-compliance. However, there is time now to ensure you are ready for its implementation to ensure your business is not at risk of a fine.
Should you wish to discuss this further, or have any questions of how this may affect you, please contact a member of our Employment Team who would be more than happy to assist you.
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