IR35 – the new regime
What is it?
IR35 are tax rules which to try and prevent workers/contractors who claim to be self-employed benefitting from better rates in relation to income tax and national insurance.
In essence HMRC are targeting those individuals, who but for the intermediary (usually a company) through which they offer their services being in place would be an employee of the end user client.
Who does it affect?
IR35 affects workers who operate via an intermediary whether that is their own company or one operated via an umbrella organisation. It particularly impacts those workers who only provide a service to one end user.
The rules do not apply to situations where the worker can be classed as genuinely self employed e.g. their company provides services to other customers, there is no obligation to perform the role, a substitute can be sent, provision of own equipment, financial risk etc.
What are they trying to stop?
If the individual is an employee, HMRC receive taxes via the PAYE system. The individual would also pay national insurance and there would be an employer’s contribution to national insurance as well.
If the individual operates via a company, upon receipt of an invoice the client end user simply pays a gross sum to that company. The individual then typically pays themselves a small salary to cover national insurance contributions and then extracts profits from the company in the way of dividends. These dividends whilst subject to income tax, are taxed at a lesser rate.
Pre 06 April 2020
At present it is the worker who is responsible for determining if IR35 rules apply. If they apply the worker’s company is responsible for paying employers national insurance. The worker must pay income tax and class 1 national insurance.
The IR35 rules changed in April 2017 in the public sector. Public organisations rather than the worker became responsible for determining if IR35 applied. This requirement will now apply to the private sector.
Post 06 April 2020
From 06 April 2020 the rule that the end user client is now responsible for determining IR35 extends to medium and large private sector clients.
Where the client is determined as small the current IR35 rules will continue to apply i.e. the worker is still responsible for determining IR35.
Small company exemption
“Small” end user companies are exempt from the new IR35 rules. The definition of “Small” is contained in the Companies Act 2006 (the Act). The Act defines a company that meets at least two of the following three tests as small:
- Annual turnover of not more than £10.2 million;
- Balance sheet total of not more than £5.1 million;
- Not more than 50 employees.
Medium and Larger Companies
If you think you fall outside of the small company definition and will be caught by the new rules, the next step is to provide a status determination statement (“SDS”). This should be sent to your workers as soon as practicable with which you contract.
An SDS is to be sent each time a contract with a worker is due to be entered into. That SDS will determine whether IR35 applies or not.
If you determine the workers you use are to be on the PAYE payroll, and you have sent to them an SDS, those workers then have the opportunity to show that they should not be included.
Currently there is no guidance as to how quickly the worker is to provide a response. Clearly the sooner a dispute notice is sent by the worker, the quicker the situation can be resolved. Once in receipt of the dispute notice, the end user client must reply within 45 days to say:
- It has reconsidered the evidence and either agrees or disagrees with its original decision together with reasons as to why.
- If there is a change in status; the end user must send a new SDS to the worker together with a statement to say the original SDS is withdrawn.
CEST link
A useful tool to use to evaluate a potential IR35 relationship is the HMRC Check Employment Status Tool (“CEST“). The tool allows the party concerned to answer a series of questions in relation to the relationship to see if IR35 may be applicable. CEST will produce a summary outcome which the party concerned can retain. This summary outcome can be used in your evidence of the IR35 relationship should HMRC query the relationship.
This tool can be found at:
https://www.gov.uk/guidance/check-employment-status-for-tax
What happens if we are non-compliant?
If the end user is responsible for PAYE they will become liable to make those payments. Any delay in doing so will mean interest and penalties will accrue.
Summary
If you have any questions in relation to the new IR35 regime, please contact us at [email protected] and we would be pleased to help.
