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IR35 FAQs

IR35 is tax legislation, which was introduced to crack down on perceived tax avoidance whereby individuals would seek to avoid paying employee income tax and national insurance contributions by supplying their services through an intermediary. An intermediary could be a personal service company (PSC) or another type of intermediary company such as an agency.

IR35 initially meant that the contractor would be responsible for determining whether they should be taxed as an employee (meaning the tax liability would sit with them). However, due to difficulties enforcing this, in 2017 the Government reversed the responsibility for determining tax status to place this on the ‘end-user client’ in the public sector. On 6 April 2020 this change will be extended to medium and large end clients in the private sector.

Put simply, if the end user client is a ‘small business’ (defined below) then the April changes will not apply, and the contractor will still be responsible for determining tax status. However, if a small business is an intermediary in a contractual chain with an end-user client who is a medium or large company then the April changes will still apply.

To qualify as a small company, a company must meet at least two of these three qualifying conditions:

  • turnover of £10.2m or less;
  • £5.1m or less on its balance sheet; or
  • 50 employees or less.

From April 2020 medium and large companies will be responsible for determining the tax status of individuals contracting with them via one or more intermediaries if they are the end clients. Where the status is determined as employment, any payment to the contractor should have the correct employment taxes deducted otherwise the end client will be liable. The end client could also be subject to further financial sanctions from HMRC.

Similarly, if an intermediary company such as an agency receives a determination from the end client then it is their responsibility to deduct the correct taxes if they are the fee payer. If there are further intermediaries involved in the contractual chain, then they will be responsible for passing on the determination to the ultimate fee payer.

This is a complicated question, but the simple answer is no – not always. Employment status in employment law, and employment status for tax purposes are two separate concepts. However, it would be persuasive to a Tribunal that an individual will be employed if they are taxed as an employee.

This obviously creates difficulties in the context of IR35 because if an individual is determined to be employed for tax purposes, then this could leave companies open to potential Employment Law claims (such as for unpaid holidays, sick pay or even for unfair dismissal). Therefore, companies will need to careful about how contractual arrangements are structured and consider the likelihood of employment relationships being created.

If your business is affected by the upcoming changes in April it will be important to make plans to ensure that you are adequately protected. Companies are taking a variety of measures to ensure that they are prepared, and we have listed the most common approaches below:

  1. Umbrella companies
    Some businesses are asking individuals to contract with ‘umbrella companies’ instead of PSCs. Umbrella companies employ individuals and deduct PAYE (meaning they are IR35 compliant). They usually charge a monthly fee for their payroll and admin services. As an umbrella company directly employs individuals, there is a break in the contractual link so other companies further on in chain are unlikely to be deemed as employers (such as end clients or agencies). Nevertheless, it is important to be aware that as the individual is employed, such an arrangement with an umbrella company could trigger the Agency Regulations 2010 and the Conduct of Employment Agencies and Employment Businesses Regulations 2003 to apply and it would be advisable to seek further advice about this.

  2. Operate outside of IR35
    Another option is to attempt to operate outside of IR35 and continue to treat individuals as self-employed for tax purposes. To do this there would need to be proof that even if there was no intermediary, the individual would still be self-employed. When deciding this HMRC will consider what the relationship between the contractor and the end client looks like in practice (not just what is in the contract), including but not limited to:
    • Control – there must be no control or minimal control over the self-employed contractor;
    • No mutuality of obligations – there should be no ongoing and regular obligation to give the contractor work or for the contractor to accept work; and
    • Substitution – the consultant should not have to provide a personal service and should have an unfettered right of substitution.
  3. Deduct PAYE from payments to PSC
    The action that many companies will end up taking will be to deduct PAYE from payments made to PSCs. This will satisfy IR35, however the consultants are likely to lose out on the now taxable income. This is a tact that several companies are taking to comply with IR35 without intending to directly employ contractors. The thought behind this is that the contract is with the PSC, so there is no direct contractual relationship between the individual and the company. Nevertheless, it is easy to understand that if a consultant is no longer receiving preferential tax treatment and are being taxed as an employee, they may be inclined to claim that they should receive employee benefits such as holiday pay to compensate. Therefore, even though there is no current case law to suggest that individuals could claim to be employed despite contracting through a PSC, it is likely that such claims will be more common in the future. Furthermore, it is worth bearing in mind that it will take time and money to defend employment claims regardless of whether or not they are successful.

If you have any questions about IR35 you are welcome to contact the Employment and Holistic HR Team at MBM Commercial. Please note that we are not tax specialists so there may be tax aspects that we cannot advise on. We would recommend that you take your own tax advice.

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