What Is IR35
IR35 rules aim to address tax avoidance by individuals working in a role of an employee but through an intermediary, such as a limited company. The rules look at the relationship between the worker (contractor) and the end user/client for whom the work is being performed, and determines whether the worker is truly operating as a self-employed individual or should be regarding as an employee.
Since its inception in 2000, IR35 legislation has been used to assess those predominantly working within the public sector, however, new changes to these rules coming into effect in April 2020 will mean that all small-medium sized businesses within the private sector will need to audit their flexible workforce and assess those operating as self-employed contractors.
The assessment will determine if the workforce fall inside, or outside, of IR35 legislation. Those falling ‘inside’ will mean that they are effectively falling foul of the new legislation and so ought to be regarded as an employee.
What are the authorities focusing on when assessing Employed / Self-Employed?
When determining whether a role falls outside IR35 and is compliant with off-payroll working reforms, HMRC will take the following factors into consideration:
- Control – Will the contractor have control over where, when and how he or she performs the work?
- Right of substitution – Will the contractor be able to provide a substitute for the services to be provided?
- Mutuality of obligation – Is the end user obliged to offer work, and if so, is the contractor obliged to accept it?
- Exclusive service – Will the contractor have the right to take on projects with different end-client simultaneously?
- Provision of equipment – Will the contractor be expected to provide their own equipment to provide the service?
- Financial risk – Does the financial risk for the required services lie with the contractor?
- Part and parcel – What is the level of integration into the end user’s business? Will the contractor have limited or no access to staff facilities?
- Employee benefits – Will the contractor be in receipt of employee benefits of any kind, that would otherwise place the individual in a similar to an employee?
HMRC have released a useful online assessment tool to check employment status for tax (CEST). The tool can be accessed via the link below:
If you are responsible for sourcing contractors on behalf of end-users (your clients), it is important that you discuss these changes with them now, as there a number of steps they will need to take as set out below.
The link below sets out the legal test to determine a contractor’s status.
It is essential that end user clients seek their own legal advice about this specific legal test and criteria for determining the status of the contractors they are working with (or intend to work with) given that they are procuring the services that the contractor will carry out, and are therefore the operational decision makers as to the nature and scope of the services. TCP are not able to give advice on this, the onus is on the client.
• Seek legal advice now as to whether and how these rules will affect their company and the engagement of current and new
contractors who are working through PSCs
• Ensure all relevant internal teams are fully informed of the changes and how they apply to them in practice when engaging with contractors
• Put processes in place to enable them to make an assessment (based on the legal advice provided to them) in relation to each contractor as to whether or not, they would be regarded as an employee had that contractor been engaged directly by them.
• Communicate the status determination to all the parties in the contractual chain – the status determination must include the result of the determination and explain the reasons for that conclusion
• Ensure the contractor accepts the status determination and provide the contractor the opportunity to challenge the status determination through their established dispute process in line with the rules
• Ensure they have taken legal advice if they intend to rely upon the exclusion for “small” companies as they will need to provide evidence to support this position.
TCP will not be able to process contracts without having received a copy of the client’s status determination statement. As described, it is important to have discussions with clients now about how they will approach the new rules, particularly given that some current client projects will be continuing post 6th April 2020.
In completing its due diligence, TCP will require the completion of checklists and provision of certain documents (the documents required will be different depending on the outcome of the client’s status determination), before entering into contracts.
TCP will be able to offer clients and contractors different contractual terms (Supplier or Temporary Worker terms) depending on the client’s assessment of the contractor’s status. We are in the process of reviewing our terms and time-record/invoice documentation and revising them to reflect the predicted changes in legislation. We will send these out soon as this process is complete.
TCP Can Help
If you engage with contract workers and feel that some may fall ‘inside’ of IR35 legislation, then TCP can help. As a UK employment agency, TCP specialize in employing skilled contractors on behalf of clients, ensuring that the correct taxes and NI are being paid whilst also ensuring they are paid accurately and on time every month. Get in contact with TCP today to see how we could help your contract workforce. Call our UK office on: 0044 208 5 800800.