Everything you need to know about the new tax rules but were too afraid to ask.
New IR35 payroll reforms will have a big impact on private-sector companies when they come into force in April 2020, putting the burden on them to decide the tax status of contractors they hire.
The new rules are effectively a revamp of the legislation first introduced in 2000 to stop workers and companies paying less tax by being ‘disguised employees’: doing the same job but getting paid through a limited company (known as a personal service company [PSC]) instead of being on the payroll.
The big change is that, before, contractors were responsible for determining whether they were effectively employees. But, from April it will be the companies paying them that must decide – and will be liable for any outstanding tax if a worker is deemed by HMRC to be an employee.
If a company decides that the contractors working for it are employees under IR35 then it will have to tax those contractors at source, just like a normal employee, as well as paying employers’ National Insurance contributions as if they were on the payroll.
There’s been an outcry from companies and employers’ organisations, which argue that firms will face higher tax bills, more form filling and even more red tape. But the government has remained unmoved. It says only around one in ten PSCs complied with their obligations to pay NICs and PAYE contributions, which could cost much as £1.3 billion by 2024 in lost revenue.
Around 230,000 PSCs will be affected by the change, HMRC estimates, of which it believes as many as one-third are fronts for ‘disguised employees’.
What do we need to do?
Businesses are urged to audit their contractor workforce as soon as possible to decide whether they fall within IR35.
HMRC has a range of criteria to decide whether a contractor is in ‘deemed employment’. The checklist includes whether only that particular person could do the job (known as ‘substitution’), if the employer has some control over how the contractor does the job (such as hours, location and dress code), and whether the company has any obligation to offer work to the contractor – and if they are obliged to accept it.
What are the options?
If you don’t think your contractors fall inside IR35, have assessed their individual working conditions, then you don’t need to do anything.
Some big companies, including Glaxo SmithKline, Rolls-Royce, HSBC and Lloyds, have reportedly decided to no longer use contractors working through their own limited companies to ensure they don’t fall foul of the new IR35 rules, preferring instead to either register them as employees or work with them through ‘umbrella companies’.
Umbrella companies were a popular solution for public sector organisations with large contractor workforces when the IR35 rules were implemented for them in 2017. These act as intermediaries between the freelancers and their end clients, deducting a sum equivalent to employers’ National Insurance contributions from contractors’ income, as well as a service charge.
Contractors could be hard hit by the new rules, losing as much as a quarter of their take-home pay.
Although the new rules are just months away there remains a lot of confusion about what they entail – and plenty of myths. Here are some of the biggest:
IR35 applies to all companies
No. There is a very important exception for small companies – employing fewer than 50 staff, with turnover of less than £10.2 million and a balance sheet under £5.1 million. These are exempt from the new IR35 rules.
We’re okay because we have ‘IR35-proof’ contracts?
No. Some companies have tried to create contracts so their freelancers fall outside IR35. But, HMRC decides a contractor’s tax status according to a person’s working conditions, not their contract. So, it doesn’t matter if a contract lasts for several years, or if it contains ‘substitution’ or ‘control’ clauses – if you can’t prove that a particular contractor can be replaced or choose their own work schedule, or fulfil the other criteria HMRC has for what constitutes employment, then those agreements could be disregarded.
Our contractors come in and use our equipment, so that must mean they’re employees?
Not necessarily. Plenty of companies require contractors to work on site and use their kit, such as laptops or phones, for IT security. Providing the rules apply to everyone, then it isn’t positive proof those workers would fall inside IR35.
Employees under IR35 would be eligible for benefits like holiday and sick pay
No. They’re regarded as being employee only under tax law, not under employment law. Their employment status will not have changed, so they won’t be eligible to the same rights and benefits as staff with an employment contract.
Our preferred partner of business insurance, Hiscox, understands how important your business' reputation is and tailor their cover and claims procedures to ensure that relationships can be protected and preserved where possible. This means should the unexpected happen, their comprehensive cover will help to keep your business reputation intact. IoD members can save 5% on Hiscox’s standard rates for the lifetime of your policy.
0800 280 0354
Find out more