The Coming Changes in IR35 Legislation

Are You Ready?

There’s lots of different news articles about IR35 changes at the moment, especially since the reform of the legislation in the Public Sector in 2017, which is now scheduled to run out to Private Sector businesses as from April 2020.

Basically, the Government thinks it’s unfair that Contractors, running their own businesses, should pay less Tax and National Insurance than an employee, potentially performing a very similar role within a business.

As we all know, self-employment isn’t for everyone, and the risk, stresses and strains run far deeper than Tax and National Insurance, but IR35 legislation looks at tax avoidance from the Hirer point of view (Employers National Insurance) and from the Contractor point of view (Tax and National Insurance short falls).

Let’s remind ourselves of some of the key facts about IR35:

  • logo IR35 is legislation in relation to hiring Contractors – first introduced in 2000

  • logo Main purpose is to protect the Contractor and collect unpaid ‘deemed’ taxes

  • logo Inspections look at whether the Contractor is disguised as an Employee

  • logo HMRC will penalise the Business hiring the Contractors if found guilty of IR35 rules

  • logo Main penalty is deemed Employers National Insurance Contributions

So, with this in mind … Does your business hire Contractors?

If the answer is Yes, then as from April 2020 it will be your responsibility to determine a Contractors IR35 status, which means, you will need to establish some key facts about your potential Contractor to ‘prove’ that they are self-employed.

Some quick, essential tasks to complete are:

  • logo Ask for the Sub-Contractors UTR (Unique Trading Reference) – this is issued from HMRC when any self-employed person registers to declare to HMRC they are now self employed, responsible for their own taxes

  • logo Review your ‘Working Practises’ … Inspectors look at more than contracts … the Contractor must be treated differently than an employee … do a comparison …

  • logo An initial Sales Level Agreement with Contractors is always a good idea – based on a Project to be completed, rather than an open-ended agreement – Mutual Obligation to work together

  • logo Ask the Contractor if they have anyone else who could substitute if they were not able to complete the project – Substitution shows the contract is business to business, not business to specific individual contractor.

  • logo Control must always be with the Contractor as to how they work and when they work – no set working patterns - evidence and communication will play a key factor to fall outside of IR35 regulations.

  • logo Contractors invoice you and will be paid to their business terms and conditions – different to your employees pay day!

An added bonus:

Contractors have a website, office facilities, maybe other employees and use their own equipment … this shows they are running a business and not just providing individual services to you, as an employee would …

And finally, there must be some financial risk to the Contractor if they didn’t complete the project ontime, correctly, to the standard agreed – they need to demonstrate their ‘will put it right’ scenario at whatever the cost …

Just as a heads up:

This will only initially affect medium and large businesses … there’s a proposed exemption to small businesses at the moment, so if you meet any 2 of the following criteria, then you will have to review your IR35 compliance procedures from April 2020:

  • logo Annual Turnover is more than £10.2 million

  • logo Balance Sheet total is over £5.1 million

  • logo You employ more than 50 employees

The legislation is very complex, so all of the above points are to highlight some main features. If you have any IR35 questions or would like to discuss IR35 specifically for your business, then please contact us. We would be happy to work with you to ensure your compliance with the legislation.

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