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IR35 – who’s the boss?

Posted on August 27, 2019

Business Bulletin August 2019

Contractors across the north-east are facing significant changes to their tax status, which could cost workers and businesses dearly.

New rules for administering IR35 legislation come into place in April 2020, with private companies becoming responsible for determining if workers are truly contractors, or if, at least in the eyes of HMRC, they are deemed to be employees.

The aim of IR35 is to ensure that an individual who works like an employee should pay the same employment tax and national insurance contributions as if they were an employee. IR35 or ‘off payroll working rules’ as they are known will force businesses and workers to examine how they work to ensure the right payments are made to the tax man.

For many workers, providing services as self-employed consultants generally leads to lower amounts of tax and national insurances contributions than if they were an employee. Where the worker provides services through an intermediary, which could be another individual, a partnership or a company – they will face smaller tax liabilities.

Contractors are commonplace in the oil and gas sector and that status is relevant where an individual moves from one client to another regularly, works on a project basis or works for more than one client at a time. However, an individual who supplies his or her services via an intermediary, but only works for one client, may be deemed by HMRC to be acting as an employee – or acting ‘in payroll’.

In April 2017, the government changed rules for the public sector, which made the authorities themselves responsible for deciding whether a worker should be treated as an employee, and in 2020 those same changes are being rolled out to the private sector.

For income tax and National Insurance Contributions (NIC), the worker will be treated as if they were employed by their client, and the client will therefore be liable to pay tax and NICs as they would for a normal employee if they are deemed to work for one client.

Businesses can learn from the mistakes made by the public sector when it faced these changes two years ago. Firstly, companies should ensure they look at each case individually, as contracts do differ. The liability - and accompanying fines for non-compliance - moves away from the worker and onto the business so care should be taken.

The decision on whether an employee should be ‘off payroll’ is based on a number of factors and employers and contractors have complained that the process can be confusing. Determining issues include whether the contractor has any autonomy over how they deliver services – do they have a ‘boss’? If the contractor cannot do a job, are they able to supply a substitute? Contracts without an end date would raise alarm bells at HMRC, as that implies more of an employer:employee agreement.

The changes to IR35 have already seen firms give their contractors an ultimatum – sign on the payroll or leave – but this is short-sighted and can be avoided with the right advice and scrutiny. There are exceptions to the rules, and those who genuinely provide their services as a freelance consultant have nothing to fear. Businesses are expected to exercise ‘reasonable care’ and there is still enough time to analyse individual cases to avoid stiff fines and keep taxation and national insurance payments fair.

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