IR35: What is it & Why Does it Matter
Two years ago, businesses were frantically fortifying themselves against the introduction of GDPR. Now in 2020, the private sector is bracing itself for the latest reform to IR35 with the introduction of new off-payroll working rules.
What is IR35? What does it do? How will it affect me? Come April, understanding the answers to each of these questions will be vitally important. So, to aid you with your preparation, may we present the Zircon guide to IR35.
What is IR35?
Initially implemented in April 2000, IR35 aims to distinguish between those genuinely in business for themselves (self-employed) and those deemed as ‘disguised’ employees through the combination of a series of factors and tests.
IR35 – A Brief History
IR35 is a piece of UK tax legislation implemented by HMRC. It was designed to prevent workers from leaving a position only to return days later as a limited company and do the same job as before, but pay corporation and dividend tax rather than income tax.
By working through the intermediary of a limited company, referred to as a Personal Service Company (PSC) by HMRC, contractors are liable to corporation and dividend tax, but by paying themselves a low salary they can stay below the threshold for Employees National Insurance. On the other side of the fence, the organisations offering the contracts do not have to pay Employers National Insurance for the services of these companies. A significant factor in establishing the popularity of contracting before the implementation of IR35.
Though many contractors are genuinely in business for themselves, the system was abused by some individuals and organisations. As previously mentioned, IR35 allows HMRC to examine the relationship between contractors and their employers. This examination is more than just ticking off items on a checklist, rather more painting a full picture of each unique situation. That being said three key tests lie at the heart of IR35.
- Personal Service – Is the service personal or is it a genuine business offer?
- Control of Work – To what extent do employers control the services being carried out by the contractor.
- Mutuality of Obligation – Is there an obligation for the employer to provide consistent paid work? Is the contractor obliged to accept the work offered?
Should HMRC determine that, if not for the existence of a PSC, the relationship is that of employer and employee then the contract is deemed to be inside IR35. If contact between the two and the established working practices show that this is not the case, then the contract is deemed to be outside IR35.
Historically the responsibility of determining the IR35 status of a contract has rested in the hands of the contractors. It was up to them to determine if they would be outside of IR35, and as such be able take advantage of the tax savings, or if they would fall inside of IR35. This changed in 2017 after a reform of the regulation and the introduction of the Off-Payroll rules for the public sector. The key focus of the reform was to shift responsibility for determining IR35 statuses onto public sector employers.
How Could It Affect You?
This year the IR35 Off-Payroll rules are to be rolled out to the private sector. However, the reform will only affect companies that do not meet the following attributes:
- an annual turnover below £10m,
- fewer than 50 employees, or
- a balance sheet showing less than £5.1m in assets.
As with the public sector should your company not meet these criteria, you will now be responsible for determining the IR35 status of workers. This will include contractors with which you have an existing contract.
Should you determine a contractor to be within IR35, either with assistance from the official government CEST tool or through an assessment process, the fee-payer will be expected to deduct tax and national insurance at source via PAYE. If you engage with contractors directly you are considered to be the fee-payer. Care should be given that the correct status is determined for each contractor on a case by case basis, as the fee-payer will be liable to the tax and National Insurance owed should HMRC disagree with a given status.
Should contractors want to retain their position, or take on a position that is deemed to be inside IR35, it could be a possibility that they will seek an increase in payment rates. This increase will allow them to continue taking home the same level of income as they did before the reform. However, you must also be prepared for some existing contractors to terminate their contracts to seek an outside IR35 contract elsewhere.
Alternatively, there is the option to obtain contractors through umbrella companies. By working in this way the responsibility of tax payments falls onto the shoulders of the umbrella company, as the contractor is employed by the umbrella for the duration of the contract.
We Can Help
We appreciate that IR35 will cause issues for clients and potential clients that utilise contingent labour as part of their recruitment plan. For those that are concerned about the after affects of the new Off-Payroll rules and the high risk of loosing key contractors, Zircon is perfectly placed to provide resources to make good the loss and free you from the overhead of managing large numbers of individual contractors.
Where you may now look to package up work into outcome-based Statement of Work contracts, rather than continue to hire contractors, Zircon can be the trusted service provider that you can rely on to get the work done. Depending on the urgency of each work package we can scale our teams to meet that demand. You would no longer have to worry about the availability of staff, as we would take on this responsibility for you.
Though there will have to be a period of familiarisation when we begin working with a new client or product, once we have worked on a project, and are familiar with it, we have knowledge management processes in place so that, for subsequent pieces of work, we can hit the ground running.
Alternatively, for those clients that are unfamiliar with outsourcing work to an external company, we can help advise on how to package up work projects into outcome-based deliverables.