Here at Smart Pension HQ in London, we have had a very busy start to the new year, with lots of exciting projects taking place both in the UK and overseas. We have also recently seen a steady flow of queries from employers, asking about the imminent enforcement of IR35. As such, and because this is a topical and relevant subject within the payroll and pension markets, I thought it may be helpful to give an overview of what exactly IR35 is — and what it could mean to you, as a contractor or an umbrella agency.
In 2018, the Chancellor announced that the government will reform the off-payroll working rules in the IR35 private sector, following the implementation of similar legislation in the public sector in 2017. What this potentially means is a significant change for businesses that employ workers who have their own Personal Service Company (PSC), also known as Limited Company Contractors. From April 2020, private sector businesses are expected to meet these reforms, although some small businesses may be exempt.
It is estimated that if non compliance of IR35 continues at its current rate, by the year 2023/24 it will cost the Exchequer £1.3 billion annually. The responsibility for assessing IR35 status for tax purposes no longer falls solely on the contractor’s intermediary (see below), but on the end business organisation instead. That means you may be affected by these rules if you fall into one of the following categories:
- a worker who provides their services through their intermediary
- a client who receives services from a worker through their intermediary
- an agency providing workers’ services through their intermediary
HMRC refers to some workers as ‘disguised employees’ – these are employees who work full time, but pay less tax than they possibly should do because they operate through an intermediary. An intermediary will usually be the worker’s own PSC, but it could also be a partnership, a managed service company or an individual.
HMRC has set guidelines that will allow companies and individuals to ascertain whether they fall inside or outside of IR35 rules.
Inside IR35 simply means that the contractor is subject to PAYE, and is expected to pay the same amount of tax and national insurance that a permanent employee would have had deducted from their weekly or monthly wage.
Outside IR35 means that the individual is operating legitimately as a limited company or other intermediary. The contractor is responsible for determining the right amount of tax to pay.
How to assess whether you fall inside or outside of IR35
There are four factors that HMRC uses to determine if IR35 applies:
- Substitution — If the contractor or the end business is able to send a substitute to complete works in the contractor’s place, this suggests the contractor isn’t providing a personal service and therefore that the worker isn’t a disguised employee.
- Control — If an end business controls the workload of the contractor or how the work is carried out, that suggests the person is inside IR35 because they are not providing a specialist service as a contractor.
- Mutuality of Obligation (MOO) — If both parties pass the above tests, it is unlikely that MOO applies as it will be deemed outside IR35 anyway. MOO can be present in both contracts of service and contract for service.
- Risk — If a contractor can make a profit or a loss (i.e. bears a financial risk) this would suggest that the contractor is outside IR35.
Whether you are a contractor or an agency providing workers, it is very important to understand the rules around IR35 and to consider if they will affect you in the future. Failure to comply may result in a penalty charge. The penalty will be a percentage of the tax and National Insurance contributions that HMRC would have lost if they hadn’t carried out their inquiry. You will also be asked to repay tax and National Insurance that is owed. For more information visit: https://www.gov.uk/topic/business-tax/ir35 or contact your accountant/tax advisor
I hope this overview has been helpful and has given an insight into how these reforms may affect your tax position going forward. These rules apply to most private sector businesses from April 2020.
If you would like further information about anything at Smart Pension, of course, we’d be delighted to hear from you. Please contact firstname.lastname@example.org.
Head Of Payroll at Smart Pension