Jane Crosby from Hart Brown Solicitors explains that IR 35 is an important piece of tax legislation affecting employers and how they operate their business.
What is IR35?
IR35 essentially determines who is responsible to pay income tax and National Insurance Contributions (NICs) and will allow the government to collect tax from employers where an individual is operating as an employee in all but name.
IR35 applies primarily to engagements via an individual’s personal service company. These are companies set up by self-employed individuals for their services, so they pay less tax.
The government believed certain self-employed contractors were exploiting the tax system by terminating their employment to create personal service companies and then returning to the same role in a contracted relationship, therefore benefiting from the tax advantages of a company.
The issue for the government is whether an individual is contracted to provide services as an employee or as a self-employed individual. If the person is seen as an employee then they have to pay income tax and National Insurance Contributions in the normal way. If on the facts and the contract the individual is self-employed then IR 35 is applicable.
IR 35 does not change the fundamental recognised tests of how to determine whether an individual is an employee or a self-employed person: such as the level of control a business has on its individuals, the right of an individual to substitute their services, whether an individual has their own insurance and equipment and the control of that person, whether they have the freedom to work elsewhere and determine their method of working.
Many of the high-profile cases like Pimlico Plumbers have sought to revisit these tests and while a contract is important to determine status it will also depend on the facts of the situation.
If a self-employed person contracts through a personal service company, then it is currently for the company to decide if the individual is an employee or not. If they are an employee, then the personal service company pays the PAYE
What is changing?
With effect from 6 April 2020, the burden of making the decision and operating PAYE, transfers from the individual and their personal services company to the actual business who engages their services. This is why employers need to be aware of these changes.
This could affect intermediary companies who supply workers to businesses because essentially it is the end user who is responsible with the advent of IR35.
How should employers prepare for these changes?
- carry out a detailed review of how many individuals are affected in the business and review all self-employed contracts;
- review working practices;
- update contracts and policies especially if a third party is involved as you may need to move your personnel onto contracts of employment;
- update policies when recruiting individuals so that there is full disclosure of their status; and
- seek advice from a specialist who will be able to look at a person’s status in the business and deem whether they need to be signed up on a contract of employment before April 2020.
To speak with Jane directly about this or any other employment-related matter, please email JZC@hartbrown.co.uk or call 01483 887766.
This is not legal advice; it is intended to provide information of general interest about current legal issues.