What is the IR35
The IR35 is also known as the Intermediaries Legislation. It was first introduced in April 2000 to stop tax avoidance by individuals working as an employee for a company through an intermediary, such as a limited company.
If they choose to, HMRC can investigate anyone they think has been avoiding tax in this way and recoup the applicable tax and National Insurance.
What does this mean for employers?
From April 2020, your responsibility as an employer changed and it will now be up to you to determine whether off-payroll working rules apply when you receive an individual’s services.
You’ll be responsible for deducting tax and National Insurance via PAYE if your contractor falls under the category of employee under the new IR35 guidelines. This could be the case even when you thought you had employed someone as a contractor or temporary worker.
The cost and responsibilities for you as an employer are serious if you’re employing contractors, so it’s important that you make sure you are aware of the rules and prepared to react in advance of April 2020.
Where do I start?
Look at your current workforce and conduct a thorough review of all staff and contractors working within your business. You need to determine which of them are affected by the new rules.
You can use the Check Employment Status For Tax tool to determine if a staff member or worker on a specific engagement is classed as employed or self-employed.
Before you use the tool, you’ll need the following information;
- What are the workers’ responsibilities?
- Who controls the individual?
- How are they paid?
- Are they directly in receipt of any benefit or expense?
This process is reasonably complicated, and you should seek professional advice if you are not completely sure what you are doing. The consequences can be expensive if you make a mistake.
What about self-employed people?
This isn’t as simple as it used to be. It is important that you look at the individual contracts and nature of work for every single employee you have, especially where you deem them to be self-employed.
If you exercise a certain level of control over your contractor, then HMRC could determine that they’re more like an employee, even if they’re only working with you temporarily.
If your workers contract stipulates what hours they work, where they work, or what they wear to work (excluding apparel required under health and safety laws), then it’s likely your contractor will be classed as an employee. It will be up to you to identify that the rules have changed on their behalf and to pay their tax and National Insurance contributions.
If you would like to maintain your current working relationship, you might have to review their contract. It’s important that you make sure that contractors maintain a certain level of distance from your business. If there’s no real difference between them and an employee, you can’t hide that from HMRC anymore.
Can I just get rid of everyone?
When IR35 came into effect, your company National Insurance Contributions and your payroll responsibilities are likely to have significantly increased if you have lots of contractors.
You might determine, once you’ve properly worked out the financial implications of taking responsibility over the tax and National Insurance contributions of so many contractors, that it isn’t worth having any more. You might consider terminating all existing work contracts.
If you are planning on terminating contracts, it is important that you do this in the correct manner because if your contractors are suddenly recognised as employees, formal redundancy must be offered. Make sure you’re terminating contracts legally and professionally and seek advice from an expert if you aren’t sure how to do this properly.
Ok, I’ll just get rid of everyone
This might be a bad idea, especially if IR35 is the only reason you’re doing this. We’re confident that you’re happy with the work a lot of your contractors and temporary staff are conducting, and some of them probably are genuinely self-employed. It would be a real shame to terminate contracts if there is really no need to.
HMRC said that IR35 is not intended to target people who really are self-employed. A blanket termination for non-employed staff could seriously destabilise your workforce and upset those left behind.
Assess everyone on an individual case-by-case basis and seek extra support and advice if you’re not sure whether someone will be affected by IR35 or not.
What about going forward?
You’ll be looking to recruit new workers in the future, so it’s important that your adherence to the IR35 rules doesn’t stop with the people you employ now. Recruitment advertisements should make it clear whether new roles are contracted or permanent. This way, employees, employers, contractors and payroll are all in agreement and compliance from the very beginning.
What now?
If you’re an employer, you must not underestimate the impact of IR35. If you have no idea what you’re doing, seek immediate legal advice. If you check your workforce thoroughly and put the necessary procedure in place, you should avoid any potential liabilities.
Remember to communicate with your staff. Transparency is extremely important to most workforces, so make sure your people know what you’re up to.