IR35 legislation for the private sector came in six months ago – how is it working?
IR35 legislation within the private sector has been in force for six months, four years after it was first applied to the public sector. Sometimes referred to as ‘off-payroll working rules’, IR35 relates to how freelancers and contractors pay tax and has been designed to reduce tax avoidance.
Previously, many companies were falsely hiring individuals as contractors instead of as employees in order to avoid paying employers’ National Insurance Contributions (NICs) as well as standard employment rights such as workplace pension provision, annual leave, sick leave and paternity leave.
IR35, which is essentially an employment status test for tax purposes, ensures that contractors and freelancers who provide services to companies and organisations across both the private and public sectors are genuinely self-employed rather than ‘disguised employees’. Businesses are responsible for determining the employment status of their contractors and freelancers.
IR35 rules however are highly complex. Status tests depend on:
- Whether services are provided through an ‘intermediary’ (the contractor’s own company, an agency or another third party) rather than as a direct employee.
- Supervision, direction and control – the extent to which the client dictates the contractors’ work in terms of working hours, location and so on.
- Substitution – whether the contractor can be easily substituted to complete the work.
- Mutuality of Obligation (MOO) – whether the client/employer is obliged to provide work and whether there is an obligation for the contractor/employee to accept it.
- Equipment – if the company provides equipment or the contractor uses their own.
- Payment – if the contractor is paid per project or monthly.
- Exclusivity – whether the contractor works for other clients or solely for one particular client.
AAT guide to IR35
AAT has produced a technical guide to IR35 determinations, payroll and tax, which can be accessed in AAT Knowledge Hub.
For example, if a contractor is found to work exclusively for one company, has their working hours and location set by the company and is obliged to accept work given to them, they are likely to fall inside IR35 rules, and will be classed as an employee by HMRC.
On the other hand, if a contractor has several clients, provides services through an intermediary and has control and direction over their work, they are likely to fall outside of IR35 rules.
IR35 was officially extended to apply to large and medium private sector business (small businesses are currently exempt) from April 2021, but HMRC has since confirmed they will not be clamping down on companies who fall foul of the tax reforms in the first year although they will take a tougher stance from April 2022.
We spoke to several accountants to find out what businesses need to know about IR35.
There is now a definitive line between in-house and outsourced workers
Paul Donahue, Tax Rebate Services
Businesses can no longer hire a self-employed person to be ‘part’ of their business – there is now a definitive line between in-house and outsourced workers.
Businesses should take the test on the Government website to see if their contractor falls within or out of IR35. There may be some surprises within the multiple-choice test. For example, it’s no longer allowed for a contractor to contact a company’s customers as a representative of the company if they are self-employed. Employers must also accept a substitution should the freelancer not be available.
We are supporting clients with any questions they may have while helping some transition to PAYE. Many businesses we represent have only ever hired people on a freelance basis but are now finding that PAYE is actually more beneficial. Some however are concerned about the extra paperwork and responsibility, so we are helping them navigate through the changes.
Next steps: It’s important that employers familiarise themselves with the rules before taking on any self-employed contractors or freelancers.
Verdict: There’s a definitive line between in-house and outsourced workers, employers should familiarise themselves with the new rules before taking on any more contractors.
The business is responsible for determining employment status
Andrew Law, Albert Goodman
IR35 or ‘off-payroll working’, needs to be considered when a business engages a worker through the worker’s own personal service company (PSC). The rules seek to prevent workers, who are really the same as employees, from avoiding tax and national insurance by contracting through their own PSC.
With the exception of small businesses, the business has the responsibility to carry out a ‘status determination’. This determination assesses whether the worker would otherwise be an employee. If so, PAYE and national insurance should be deducted from payments to the PSC just as if the worker were employed. With small businesses, the obligation is placed on the PSC rather than the business.
Next steps: No two businesses are the same, so support we offer clients is tailored to their needs. This will range from just advising on technical queries where clients are happy to deal with their own compliance, up to a fully managed payroll service.
Verdict: Most businesses – other than small businesses – are responsible for determining employment status.
Businesses remain liable for any unpaid tax and NI prior to issuing a Status Determination Statement (SDS)
Clarke Bowles, director of strategic sales, Parasol Group
Medium and large-sized private sector businesses are now responsible for determining the IR35 status of personal service company (PSCs) contractors.
Businesses will need to issue a Status Determination Statement (SDS) to show this. Until they do, they remain liable for any unpaid tax and national insurance. Businesses that fail to comply will ultimately face the prospect of paying back taxes and further penalties for inaccuracies. Blanket assessments, whereby a business makes a status determination without conducting an assessment, does not constitute reasonable care.
At Parasol, we are providing assignment-by-assignment advice to contractors taking on new projects so they have an understanding of whether they are working inside or outside IR35.
Next steps: The Government have introduced the Check Employment Status for Tax (CEST) tool to help businesses identify IR35 status. This tool can be helpful in understanding how HMRC would view individual cases, but be mindful that recent high-profile, public sector companies have recently been hit with significant tax bills despite using the tools, so it is not entirely accurate.
Verdict: Businesses remain liable for any unpaid tax and NI before issuing a Status Determination Statement (SDS).
Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.