Documents from HMRC alongside a businesswoman holding an electronic tablet

IR35: What do employers need to know?

Documents from HMRC alongside a businesswoman holding an electronic tablet

IR35: What do employers need to know?

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IR35 is a tax legislation that was introduced in 2000 to combat tax avoidance by individuals supplying their services to clients via an intermediary (such as a limited company), but who would be an employee if the intermediary was not used. Such workers are called disguised employees by HMRC, and avoid paying income tax and NI contributions.

Historically, it has been the responsibility (and liability) of the worker to determine their own IR35 status, but from April 2021, private sector organisations engaging contract or freelance workers will need to make this determination themselves. Failure to comply with the new rules could see businesses face substantial risk and cost.

What the upcoming changes mean.

In April 2021 responsibility for determining IR35 status is shifting from the limited company to the end client, or recipient of the service; it's a switch we already saw in the private sector back in 2017.

When an assignment is deemed to be ‘inside’ IR35, PAYE deductions must be made from the contractor’s pay. Assignments ‘outside’ of IR35 are considered a genuine B2B service and aren't subject to the same tax treatment. It'll be up to your business, as the recipient of the service, to determine whether an assignment you set falls inside or outside IR35.

How your business can prepare.

The legislation states that all eligible companies must take 'reasonable care' when assessing if roles are inside or outside of IR35 - taking a blanket approach to assessing all your roles won't deliver this.

The financial penalties can be significant if the legislation is implemented incorrectly. However, by taking a measured approach and using the support available, organisations can turn IR35 into an opportunity if they act now.

We have partnered with Qdos, one of the leading providers of contractor insurance services in the UK, to provide a bespoke IR35 solution that includes a digital IR35 status determination tool. Get in touch to find out more.

IR35: Employer FAQs

Will IR35 reforms affect my business?

Not all businesses that engage contractors or freelancers will be affected. The legislation changes will not apply to small companies with a turnover of less than £10.2m, a balance sheet of less than £5.1m or less than 50 employees. The legislation will affect all businesses that fall outside these criteria.

How long do I have to become IR35 compliant?

IR35 reforms for the private sector are due to be implemented in April 2021, and we recommend preparing well in advance, by assessing the IR35 status of all contract roles you currently engage workers for, and any that you plan to engage workers for in the near future.

Is there a legal definition of an “employee” or an “independent contractor”?

Case law is used to decide whether an individual supplying their services to a company is classed as an employee or is a self-employed contractor. Generally, HMRC will look at both the contracts between the parties and the working practices (the way the work is performed in reality).

What factors might suggest an assignment falls inside IR35?

If the following statements sound like they apply to the role, it’s likely to fall inside IR35: A substitute can be provided by the end client; the worker performs a set amount of hours per day/week; the worker is subject to the end client’s direction or supervision; the worker receives overtime pay or a bonus.

What factors might suggest an assignment falls outside IR35?

If these statements sound like they apply to the role, it's likely to fall outside IR35: The worker can hire someone else to do the work, or engage helpers at their own expense; the worker provides the equipment they need to do the job; the worker can decide how and when to provide the services; the worker regularly works for a number of different clients.

Who is liable for an incorrect IR35 determination?

Historically is has been the worker/their limited company that is liable for an incorrect determination, but when the reforms come into play the fee payer/end client holds liability.

What are the risks if IR35 isn't handled correctly?

Failure to comply with the guidelines could see your company face fines of over 50% on top of the contractor's pay, and puts your company in the firing line for litigation with HMRC; fines can also be backdated up to 4 years from when the legislation comes into play. You may also risk delays to your projects due to lack of resources, and reputational damage which may restrict your flow of off-payroll talent in the future.

How can SEC help?

We've done this before; our compliance team has extensive knowledge supporting public sector organisations through these changes in 2017. We take compliance seriously, and we're consistently recognised as the most compliant recruitment partner in our client audits. We've also partnered with Qdos to provide a digital IR35 determination service for our clients and candidates - get in touch to understand more.

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Learn more about the upcoming changes.

Download our Employer's Guide to IR35.