What is IR35?
First introduced in 2000, IR35 is a piece of tax legislation designed to reduce tax avoidance by contractors who HMRC believe to be “disguised employees” – people who work in a similar way to full-time employees but bill for their services via their limited companies or as sole traders in-order to make their earnings as tax efficient as possible.
The Government argues that a contractor paying less tax than employees is unfair, and to combat this, IR35 rules are designed to ensure that contractors working via their limited companies, deemed to be doing the same work of an employee, pay broadly the same tax.
What is the current position?
Since 2000, contractors have been responsible for self-assessing their IR35 status and National Insurance Contributions. This arrangement has been ineffective and HMRC estimates that, under current rules, the cost of non-compliance in the private sector would escalate to £1.3bn by 2023/24.
April 2020 changes
The new IR35 legislation to be introduced in April 2020 shifts responsibility for assessing IR35 obligations from the contractor or personal service company (PSC) to the end user (the business paying the contractor).
Where the end user concludes that IR35 applies, they will be responsible for accounting for and paying the related tax and NIC to HMRC, including the additional cost of Employer’s NIC.
Under the proposed changes, the new rules aim to reduce the cost of non-compliance and make it easier for HMRC to monitor and enforce compliance in the future.
An HMRC inspector will determine if a contractor is this by applying an employment test to each case, which is based on the actual working practices, rather than any contract.
What about small companies?
Where the end user is a small company, the contractor will continue to be responsible for assessing whether IR35 applies post April 2020. The Companies Act 2006 defines a small business as a business with two or more of the following features:
- turnover of £10.2m or less
- a balance sheet total of £5.1m or less
- 50 employees or fewer
What do I need to do now?
Even though the responsibility of assessing whether IR35 applies or not to contractors working in a small business will remain with the contractor post April 2020, it is prudent to ensure that the working relationship is properly communicated and all parties are in agreement regarding a contractor’s worker status.
Harwood HR can assist small businesses by providing a contract for services agreement to be issued to all freelancers / contractors which makes clear the responsibility of the contractor in terms of paying their own Tax and National Insurance as well as being clear the intention that they are not employees and therefore not entitled to employee benefits (sick pay, holiday pay, pension contributions etc.).
Harwood HR would also encourage small businesses to operate caution when engaging with contractors whose employment status may be questioned, and to use the HMRC self- employed assessment tool which can be accessed here: https://www.tax.service.gov.uk/check-employment-status-for-tax/reason-for-using-tool
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