by Charlotte Gurney
IR35 covers two pieces of tax legislation that have been created to help combat tax avoidance via off-payroll working, whether that is by workers or the firms doing the hiring. The main situation this is designed to cover is where a worker is providing services to a business via an intermediary, such as a limited company or an employment agency. The intermediary pays the worker and the end user client pays the intermediary but if that intermediary was not in place the worker would be an employee. The new rules were supposed to come into force this year but due to COVID-19 have been delayed until 6 April 2021. That means that now is the key time for businesses, large and small, to ensure that the implications of IR35 are understood, as well as how to protect the organisation and its staff.
It’s important to note that there are two pieces of tax legislation here - the original IR35 and the Off-Payroll Working Rules (OPWR) - but that IR35 is being used as a catch-all term for both. While the original IR35 has been in place for many years the OPWR will apply to the private sector from April 2021 and that’s the key change that is taking place. These rules will apply to a contractor engagement where the end user client is a large or medium sized company (e.g. 50+ employees or turnover of £10.2 million or more). However, small companies - while not affected by the OPWR - will have to comply with the original IR35 rules. The driving force behind all the changes is to stop tax avoidance and ensure that staffing arrangements aren’t making this possible. It will be up to the end user businesses to decide whether a contractor is effectively an employee and to deduct tax and National Insurance from those contractors who would effectively be an employee if not for the intermediary. Where this doesn’t happen but that worker is later found to be an employee all the tax and National Insurance that should have been deducted will have to be paid to HMRC alongside a potential percentage penalty.
When is a worker a ‘disguised employee’?
There are a number of different factors that might indicate this, including that the services have to be delivered in person so the worker can’t substitute another qualified employee instead and whether the contract is open ended - both would indicate employment. The level of risk that the worker shoulders is also important - are they quoting a fixed price and risking a loss if they don’t finish on time or do they invest their own time and money in training? Both of these factors would indicate a genuine contractor.
What do large/medium businesses need to do?
Small businesses need to ensure that they understand the original IR35 rules and the need for a determination under them. It’s also key for small businesses to be proactive about avoiding tax evasion in supply chains. For medium and large businesses there are other obligations:
- Make sure the new rules are fully understood
- Undertake a determination on each contractor’s employment status
- Issue a Status Determination Statement to the contractor and the reasons for making that determination
- Start deducting tax and National Insurance
As of April next year the new IR35 rules will come into force - it’s essential that your business is prepared. Volt's Legal Counsel ran a IR35 webinar this week - if you would like to request the recording of the webinar on IR35 - please contact: Head of Marketing - Volt International: firstname.lastname@example.org
For all other workforce solutions enquiries: www.voltinternational.com