There has been much controversy around the planned government changes to IR35, the legislation meant to prevent employees from passing themselves off as freelancers in order to avoid tax.
But what is IR35? What's changing? And what are the implications for businesses?
What is IR35?
The government defines IR35 as “off-payroll working through an intermediary”.
It is a piece of legislation designed to combat tax avoidance by contracted employees. It targets contractual workers who operate through an intermediary, such as a limited company, to provide services to a business, but who would be seen as a full-time employee if they didn’t work through the intermediary.
HMRC defines these workers as “disguised employees” as they may be awarded the same rights and benefits that full-time employees have, but are not paying the same amount of tax.
What’s changing and when?
IR35 was implemented by the government in 2000 but has been subject to continual changes ever since. In 2017, new “off-payroll” rules were implemented for contractors working for public sector organisations, and in April 2020 they will be extended to the private sector. This is the impending change that’s causing controversy.
In the original legislation, sole responsibility for paying the right amount of tax sat with the contractor. Under the new “off-payroll” rules, the obligation now sits with the company that has hired the contractor for works.
What kind of businesses will the changes affect?
As of April 2020, all public authorities and medium and large businesses will be responsible for deciding the employment status of workers. This includes third sector organisations, such as some charities.
The rules apply to all public and private sector companies that meet two or more of the following conditions:
- Have an annual turnover of more than £10.2 million
- Have a balance sheet total of more than £5.1 million
- Have more than 50 employees
Small businesses are exempt from the change. It remains the intermediary’s responsibility to decide the worker’s employment status for each contract.
Amongst sole traders, there is some concern that the change will make them less appealing to businesses. There is a fear that corporates may stop employing sole traders if the change goes ahead in April 2020.
Although the idea behind the extension of the tax change to the private sector is to raise £3.1bn in extra revenue for the Exchequer between 2020 and 2024, many argue that it will be to the detriment of the rising numbers of self-employed workers in the UK.
So what next?
If you’re a small business with an annual turnover of no more than £10.2 million, a balance sheet of no more than £5.1 million, and no more than 50 employees, then there’s no need to take any action. You are exempt from the change.
For sole traders, there is no need to take action as long as you are already adhering to IR35. If you have only recently set up as self-employed, you will need to ensure proper IR35 adherences, otherwise, you could be charged interest and penalties on any income tax or NICs. You can find out more here.
If you’re a medium or large business, as of April 2020 you will responsible for deciding the employment status of a worker for every contract you agree with an agency or worker. The UK government has issued the following advice on how to prepare for the upcoming change:
- Look at your current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through personal service companies.
- Determine if the off-payroll rules apply for any contracts that will extend beyond April 2020. You can use HMRC’s Check Employment Status for Tax service to do this.
- Start talking to your contractors about whether the off-payroll rules apply to their role.
- Put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.
For the more information about IR35 and the impeding change, there is lots of helpful information on the UK government website.
HMRC have also issued a publication to help all affected parties to better understand the new IR35 rules and why they are being implemented. You can view the briefing, released in October 2019, here.
We'll continue to report on any updates as we approach April 2020.