Your questions answered: IR35 in the private sector
What is IR35?
IR35 is a piece of anti-avoidance tax legislation introduced by the government in April 2000. It applies where a worker is engaged by an employer though a personal business, referred to as a personal service company (PSC).
Why was this considered tax avoidance?
Employers who engaged workers by paying their PSC instead of directly didn’t need to pay Employer’s National Insurance or deduct tax and National Insurance Contribution (NIC) from the payments made to the worker.
As the worker would then obtain the payments from their business in what was perceived by HMRC as a more “tax efficient manner,” it was argued that this arrangement avoided tax and NIC.
What is changing in April 2020?
Original IR35 rules put the onus on the worker to determine if they were an employee. New IR35 rules were introduced in April 2017 to the public sector, placing responsibility on the engaging organisation to decide employment status rather than the individual.
In 2018, it was announced that these rules would be extended to the private sector from 6th April 2020, meaning medium and large businesses will be liable for deciding the employment status of individuals they are engaged with through PSCs.
If decided that the worker is an employee, employers should add them to their payroll as a “deemed employee” and deduct the relevant tax and employees’ NIC from any payments and pay any employers’ NIC to HMRC.
If workers are supplied by agencies, the employer must ensure any status decision is passed to the agency, as the responsibility for paying the tax and NIC may be with them.
How do you determine whether a worker is an employee or not – surely it is obvious?
Not quite. There is no statutory definition of what constitutes an “employee.” What has developed through tax and employment law cases are a number of tests that can be used to determine employment status.
There are three main tests: control, personal service requirements, and “mutuality of obligation” – which is fairly controversial in that HMRC dispute the meaning of this test. Factors including length of service, the degree of integration into the engaging business, and whether the worker supplies their own equipment for work should also be considered.
Is there a specific tool to help decide employment status?
Yes, HMRC have developed their online “Check Employment Status for Tax” (CEST) tool which is available for workers to use. However, CEST has been widely criticised for not following established case law in coming to formal decisions. As HMRC has lost 14 out of 16 tax cases on IR35 since 2010, there is caution around reliance on CEST.
Are there any exemptions?
Yes. The new rules only apply to medium and large businesses and larger non-corporates, such as charities and professional services firms. Small businesses that meet existing Company Law definitions are exempt from the changes.
Public sector organisations operating the legislation since April 2017 will also have to implement some additional rules relating to issuing a Status Determination Schedule (SDS) and implement a dispute resolution process. Failure to comply will lead to significant extra tax liabilities for employers.
What do employers need to do now?
In a word: prepare. Employers must identify any workers currently not on their payroll and consider, on a case by case basis, whether they should be deemed as an employee. Payroll processes must be changed to cope with the new rules, and a process for taking on new workers after April 2020 should be established. Finally, it’s important employers introduce a dispute resolution process for situations where workers disagree with decisions about their status.
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