We are very honoured to have Emma Spandrzyk of Keelys Solicitors share this guest blog with us. Her piece addresses some of the key insights many of you will have been thinking about when it comes to IR35.
I have recently joined Keelys in the employment department. I have been working as an employment solicitor for 9 years and, most recently, I have worked in-house for the police.
Some of our clients have been asking us about changes to the law on IR35 next year so we’ve taken some time to explain some of what is happening.
What is the current position?
If someone works on a self-employed basis but, in reality, they are an employee, HMRC can recover the underpaid tax and national insurance from the organisation that they work for.
Sometimes, the individual will set up their own personal service company to provide their services. If HMRC decides that the arrangement is a sham and that, if the individual was engaged directly by the client, they would be an employee, HMRC can recover the underpaid tax and national insurance under IR35. Currently, that is recoverable from the individual and/or their company rather than from the end-user. The exception to that is in the public sector, where the end-user will be liable for the tax and national insurance.
What is changing?
From April 2020 businesses with more than 50 employees or a turnover of more than £10.2m will be affected by the new rules. They will, therefore, be liable for tax and national insurance if they are found to be engaging people through personal service companies who, in reality, ‘are’ employees. If your business is smaller than that, you do not need to worry although we would not be surprised if, in future, these rules apply to smaller companies as well.
How to tell if someone falls within IR35?
If you are a larger business who will be covered by the new rules, the first step is to identify the contractors that provide their services through personal service companies.
To assess whether contractors fall within IR35, businesses will need to look at a range of criteria including the following:
- Control – how much autonomy does the contractor have in terms of how they deliver their work? If the business retains full control over how, when and where tasks are completed, this is indicative of employee status and the contractor is likely to be caught by IR35. If the contractor has full autonomy over the completion of tasks, they are more likely to fall outside the scope of IR35.
- Personal Service – does the contractor have to undertake the work themselves? The ability to send a substitute helps point towards a contractor being genuinely self-employed and outside the IR35 rules.
- Mutual Obligation – is there a requirement for both parties to continue to offer and accept work? If the business has an obligation to provide work and there is an expectation that the contractor accepts it, then this will indicate that the contractor is caught by IR35.
As part of the assessment, businesses should also consider factors such as the degree of integration that the contractor has with the business, the level of financial risk they assume and who provides the contractor’s work equipment.
What does this mean for your business?
Businesses will need to show HMRC that they have taken reasonable care in undertaking their contractor assessments. When reviewing assessments, HMRC will look at the size of the business. The bigger the business and the greater the resources available to it, the more effort HMRC will expect in relation to the process.
There is a useful tool on the HMRC website that you can use to assess whether someone is genuinely self-employed or should be treated as an employee: https://www.gov.uk/guidance/check-employment-status-for-tax
Please let me know if you would like further advice on this, which will be covered under your subscription to our Employment Healthcheck Plan. You may also want to speak to your accountant for advice on whether you are taxing staff appropriately.