Are you ready for IR35? Do you even know what it is? If you employ, or are employed as a contractor, you need to know about these changes to tax legislation! Don't worry, there's no need to trawl through the legislation to find out what's what - we have you covered with our quick guide:
What is IR35?
The revised legislation aims to prevent tax disguised employment, which has benefited contractors and in some cases, placed PAYE employees at a disadvantage. The reformed legislation, known as the ‘Off-Payroll Tax’ aims to tackle the issue of ‘invisible workforce’
Who is Affected?
IR35 targets those who are registered as a limited company, and have long-term contractual agreements within medium-to-large corporations in the private sector.
What do I need to know?
Simply put, those that sit inside IR35 will pay broadly the same tax and National Insurance contributions (NICs) as their permanent employee counterparts.
When will the changes take effect?
Monday, 6th April 2020
What are the possible penalties for non-compliance?
If your business is found to be within the remit of IR35 following an HMRC enquiry, you must pay HMRC the tax and National Insurance contributions due, as well as any interest due on these amounts. If you don’t complete your tax and National Insurance contributions returns you may also have to pay a penalty. For more information, please visit gov.uk
Is my contractor inside or outside IR35?
There are five key factors that determine whether your contractor(s) are placed inside or outside IR35. Consider the following:
- Supervision, direction and control – what degree of supervision, direction and control do you (the employer) have over how your contractor completes their day-to-day work?
- Mutuality of obligation – Does the contractor have to carry out the work themselves, or can they send someone in their place?
- Money, money, money – Do you pay your contractor the same amount each month and on a rolling basis? Or do you pay them once they’ve completed their project and supplied an invoice?
- Substitution – are you obliged to offer your contractor work, and are they obligated to accept it?
- Location, location, location – does your contractor work from home using their own resources (e.g. laptop, phone, desk, office), or do they work in-house using your organisation’s assets (e.g. office space, desk, phone, laptop etc)?
Supervision, Direction and Control: If your contractor has relatively high level of responsibility and are expected to project-manage various accounts, it’s likely they are positioned inside IR35.
Mutuality of obligation: A contractor often works from project-to-project with no obligation to carry on working for the client after the work is complete. If your contractor is expected to continue working for you after they’ve completed the task and delivered, then they should be placed inside IR35. If you’re still unsure, ask yourself this: does your contractor provide their services to other clients? If the answer is ‘no’ then inside they go!
Money, money, money: It’s simple really. If you pay your contractor the same amount each month without raising a PO, then they’re probably inside IR35. But if they only get paid once within 30 days of delivering the work, they’re most likely outside IR35.
Substitution: If your contractor is able to provide a substitute to do the work, and they aren’t obligated to perform the work themselves, this positions them outside IR35.
Location, location, location: Perhaps the most obvious one – if your contractor mostly – or always – completes their work at your office, uses your facilities and attends regular meetings and work functions they are most probably inside IR35!
I’ve identified their status – what do I need to do now?
Congrats! The hardest part is over (sort of). You must now issue a Status Determination Statement* to your contractors, which makes their IR35 status clear and explains why you’ve positioned them inside or outside IR35. Here are a few other things you should do:
Inside IR35 – as their employer, you’ll be responsible for deducting PAYE tax, deducting national insurance and paying NI contributions.
Outside IR35 – If your contractor is outside IR35, create a IR35-proof contract which states that the client has no obligation to offer you more work and you have no obligation to take it. This is what is meant by ‘Mutuality of Obligation’.
*There are a number of useful templates you can use online.
What if my contractor isn’t happy?
Contractors can no longer govern how their paid – it’s now up to you (the client) to determine their tax status. Support your decision and present the best possible case with sufficient evidence and tax documents. This will put you in the best possible position if you do encounter problems – you can simply present your findings. It will also help you to avoid any penalties.
If you’re still not sure where best to place your contractor, CEST is a useful tax tool that will help you determine employment status.
We hope that's helpful. Remember, if in any doubt, just head over to GOV.UK