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IR35: A Taxing Matter

29 Nov 2019

There’s still time to get to grips with upcoming changes to the “off-payroll” working rules (IR35).

Medium and large businesses (MLBs) should look again at their relationship with the contractors they engage through via a personal service company (PSC).  New IR35 rules come into play on 6 April 2020 which impose a greater burden on MLBs, and may expose them to non-compliance issues, additional cost and possible criminal sanction. Recent anti-tax evasion laws require all businesses to demonstrate they have put in place reasonable steps to prevent tax evasion.

Are you a MLB?

If you satisfy two or more of the following criteria, you will be deemed to be a MLB and, thus, may be caught by the new IR35 rules.  The criteria are:
  • turnover of £10.2 million or more;
  • aggregate assets on the balance sheet of £5.1 million or more; and
  • 50 employees or more.

A Change In Direction

Under the original IR35 rules, it was for the worker using a PSC  to determine if they were operating under a contract for services or if their relationship with the client company was a “disguised” contract of service.  If caught by the latter, the worker had to operate PAYE and NIC withholding through the intermediary and pay employers’ NIC.

Under the new rules, it falls to the MLB to make the determination as to the nature of the relationship between it and the intermediary. As a result, a MLB caught by the new rules may face additional PAYE obligations and an increase its NICs. 

MLBs will need to exercise caution when making that determination as the tax burden and liability will fall to them rather than the intermediary/worker if they get the determination wrong. 

Some Practical Steps

Practical steps a MLB may take when making a determination as to a worker’s status might include:
  • use of questionnaires with workers/intermediaries, the answer to which should paint a picture as to the relationship between the parties; and 
  • use of HMRC’s “Check Employment Status for Tax” (CEST) tool. This aims to provide an objective verdict as to status but is of limited value as it often fails to take account of the full scope of a worker’s engagement. 
MLBs and their HR teams should be alive to those factors that point away from a disguised employment relationship.  These include:
  • the ability for the worker to appoint a substitute, bring in additional assistance and/or appoint a sub-contractor;
  • the worker being able to freely decline or accept work 
  • control of the work performed resting with the worker; 
  • the worker having responsibility for providing their own equipment to provide the services; 
  • the worker having “skin in the game” – they can set their own margin for the work and, if they wish, they can undertake it as a loss leader; 
  • the engagement being either fixed or short-term; and
  • the worker having no entitlement to employment benefits.
MLBs should document all stages made in arriving at a determination, and ensure their contracts with intermediaries truly reflect the nature of the relationship. Where there is a disparity between the contract and the actuality, the MLB will need to agree a variation to the relevant contract with the intermediary.

Avoiding The New Rules? 

Some MLBs have elected for a different approach to bring themselves outside the scope of the new rules: they no longer engage workers through intermediaries such as PSCs.  Whilst this has some appeal, it may have adverse consequences – for example, inability to find the right resource, delayed project delivery and ultimately business profitability. Accordingly, it makes most sense to look afresh at relationships with workers and their intermediaries and the relevant contracts.

For help with IR35 matters, please contact our DMH Stallard Employment and Commercial teams.

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