“Off-payroll (IR35) reforms”

The off-payroll reforms (otherwise known as IR35) come into effect on April 6th 2020. Everybody is talking about it, but do you really know the implications? And are you fully prepared and ready?

“IR35 blame game: Barclays to halt off-payroll contractors, goes directly to PAYE.
Tesco Bank, GSK and more to follow. It’s time to act and be ready. ”

What is off-payroll working and what is changing?

IR35 or the “off-payroll working rules” as they are known are intended by HMRC to identify ‘deemed employees’ and ensure they are taxed correctly, however IR35 can impact those operating genuinely through a limited company structure due to the subjective nature of the legislation.

The off-payroll working rules apply where an individual (the “Worker”) provides their services through an intermediary to another person or entity (the “Client”). The intermediary in this case can be another individual, a partnership, an unincorporated association or a company. The most common structure is a Ltd company or otherwise known as a personal services company (a “PSC”) owned by the Worker concerned.

In April 2017, the government beefed-up the rules by making public authorities responsible for deciding whether the Worker should be treated as if they were an employee even though they had not been hired directly. This public sector reform also made the public authority or agency Client that pays fees to the Worker’s PSC, responsible for accounting for and paying income tax and NICs under PAYE to HMRC, on behalf of the Worker.

From April, 2020 these IR35 rules will be extended to Workers in the private sector.

In summary, the key change is the responsibility of defining the IR35 status of the assignment will switch from the individual’s Ltd. company to your business, the recipient of the services!

INSIDE vs OUTSIDE IR35 – What does it mean?

When explaining IR35, we often refer to these two terms regarding your status, but what is inside and outside IR35?

“Any individual deemed ‘inside’ IR35 must pay income tax and NIC contributions.”

“Any individual deemed ‘outside’ IR35 is classed as providing a genuine business to business service and is therefore not subject to the same tax treatment as employees.”

INSIDE IR35 Meaning

To be ‘inside IR35’ means that you are considered, for tax purposes, an employee of your end client and therefore subject to PAYE.

If you are operating ‘inside IR35’, you simply need to ensure you are paying the appropriate taxes, which usually involves a ‘deemed payment’ of income tax being made at the end of the tax year (you should discuss this with your accountant).

OUTSIDE IR35 Meaning

To be ‘outside IR35’ means that you are operating as a genuine business, and therefore operating outside of the IR35 rules.

If you are operating ‘outside IR35’, you are able to pay yourself a salary, draw the remainder of income as dividends, and remain responsible for your taxes as usual.

How is IR35 determined?

IR35 argues that if a contractor is working as an employee, they should be taxed as an employee, stating that there should be considerable differences between how contractors and employees work or IR35 may apply.

The three primary indicators to determine whether you are Inside or Outside are: Control, Mutuality of Obligation (MOO) and Substitution:

  • Mutuality of obligation (‘MoO’) – the principle that an employer and employee are obligated to each other – to supply continuing opportunity to work, to pay a notice period if no work is available, to serve a notice period if you chose to leave work, and so on. If there are not obligations on both sides, then there is ‘no MoO’.
  • Substitution – if the worker can be substituted by their PSC (not by other parts of the supply chain like an agency) then there is not a requirement for personal service. An end user can make only reasonable demands regarding a substitute, such as a particular trade credential or level of experience, and not reject a substitute out of hand.
  • Control in HOW the work is done – A worker can be given a very detailed specification for work, but if they are not controlled in how they deliver that, then there is not sufficient control to demonstrate an employment relationship, and the assignment should be seen as outside IR35.

Other factors

To complete an employment status assessment, which is essentially what the IR35 test is, you have to also consider other factors – that may or may not indicate that the worker is operating like an employee, such as:

  • Financial risk – does the worker and their PSC bear real financial risk? Do they need insurance?  If work is not completed satisfactorily, will they have to put it right, without charging or being paid for those corrections? If there is genuine financial risk, that indicates a lack of employment – an ‘outside’ or ‘not caught’ IR35 situation.
  • Part and parcel – does the worker look like and behave like an employee? Are they on the holiday rota? Do they have your client’s details in their email signature? Do they use a lot of end user equipment and other resources? This is often a greater risk the longer they work with one end user. If they look like an employee, they are more likely to be ‘inside’ IR35.

What are the risks to hirers?

IR35 reform imposes some increased risks to hirers who will now have to be cautious of:

  • Criminal Finances Act 2017: hirers become liable for the actions of off-payroll workers regarding tax evasion, potentially resulting in financial penalties and criminal convictions.
  • Intermediaries Legislation: hirers are responsible in ensuring supply chain compliance. Failure to do so can result in fines, penalties, and criminal convictions.
  • Transfer of Debt: hirers dealing with sole traders and unincorporated businesses are responsible for determining tax status. Inaccuracy can result in transfer of debt and PAYE liabilities.
  • Managed Service Company Legislation: transfer of debt rules applies to hirers who use MSCs.

Small Business Exemptions

Clients that are classed as “small” organisations will not be affected by the reform and will not need to decide the status of the off-payroll workers they hire and operate IR35. They will need to use the existing statutory definition within the Companies Act 2006 to determine whether or not a corporate client is small: less than £10.2M turnover, less than £5.1M balance sheet, and less than 50 employees.

Advice / How can we help?

Don’t panic. Be ready, don’t wait until the last minute (like many did for the GDPR regulations in 2019).

We are confident in the knowledge that we can provide you – both candidate and client – with expert guidance regarding IR35 and we are committed to supporting our partners through this time of change.

For more information on how we can help including offering audits on your contractor workforce, please get in touch with our MD, Jody Marks (jody@mrjrecruitment.com) today.

We will also be hosting a series of free round tables and events over the next few months to help you transition through this time of change and prepare yourself for the incoming implementation of this legislation. If you are interested in attending these, please speak to Grant Spencer (grant@mrjrecruitment.com)