What is IR35?
IR35 is the colloquial name for a set of laws designed to ascertain whether (from a taxation perspective) a self-employed individual is genuinely self-employed or merely seeking to avoid PAYE income tax and national insurance.
A common example might be were someone works for a business as a ‘freelancer’ but has the same hours and duties as a full-time employee of that business. IR35 might class them as a ‘disguised employee’ and launch an investigation.
What is a disguised employee?
A disguised employee is an individual who has the same responsibilities as a current employee but who is not making the same PAYE contributions and not receiving the benefits that come with employment status (such as holiday and sick pay). This is whether or not the individual is contracting direct with the business (i.e. as a sole trader) or via an intermediate limited company or LLP (often referred to as a ‘personal service company’).
If both the individual and business are found to be breaking the rules, each party will have to make amends. The business will have to deduct national insurance and income tax from the disguised employee, the disguised employee will have to pay higher amounts of tax and one or both parties may face penalties and interest.
Who is responsible for deciding IR35 status?
Under current law, in the private sector (it is different in the public sector) it is up to the individual to determine whether or not they are ‘IR35 compliant’ and in most cases, the business has been entitled to take that assertion at face-value.
What changes in April 2020?
From April 2020, the private sector is being brought in to line with the current legal position for the public sector, which is that the responsibility for determining the IR35 status of an individual shifts to the business that contracts with them.
This change has been brought about because HMRC believe that they are losing up to £1 billion of revenue per annum as a result of disguised employees. In the 2018 Budget, the then Chancellor Phillip Hammond said that HMRC believe that 1/3 of contractors who use personal service companies are disguised employees. Logistically, practically and in terms of enforcement, HMRC have realised that their prospects of return will be far better against businesses than they are against individuals (and/or their personal service companies).
How common are IR35 investigations?
Under the current law, investigations in the private sector have been sporadic and the focus has been on the public sector. It is anticipated that HMRC will be provided with significant resource to investigate and challenge private sector businesses post April 2020.
How have some employers reacted to the 2020 changes?
In recent weeks and around six months before the new IR35 tax legislation comes into effect, a host of banks including Barclays, HSBC and most recently Lloyds have informed contractors that they will only be engaged if they are willing to become an employee (PAYE). Those banks have taken the view that they do not wish to incur any risk of liability (or that perhaps they do not have the resources to properly consider the status of each contractor) and so are adopting a very cautious approach.
Is the banks’ reaction over the top? Many believe so, but what is clear is this: any business that wishes to continue to engage contractors beyond April 2020 needs to have a clear understanding of who falls inside or outside of IR35 (i.e. who is a disguised employee and who is not), systems in place for accurately checking and continuing to monitor that and robust procedures in place to mitigate the tax risks.
If you are a business that engages contractors and needs advice on the content of this article, please call our Employment Team on 01603 281153.
Note: The content of this article is for general information only and does not constitute legal advice. Specific legal advice should be taken in any particular circumstance.