With the new IR35 rules governing the use of freelancers and contractors expected to come into force from the beginning of April, Claire Halle-Smith, partner at law firm Wright Hassall, is urging businesses to start preparing to ensure compliance.
Across all sectors, businesses have traditionally used the services of self-employed contractors, freelancers and consultants to complement their permanent workforce, especially during busier periods when extra help is needed.
For contractors or client companies with freelancers on their books, these rule changes should already be on their radar, with the updated rules likely to impact the way services of such contractors are purchased from April 6th.
How we arrived at this point
Previously, contractors and the client companies using them, were able to enjoy significant tax advantages by providing their services via an intermediary – usually a personal service company (PSC).
However, HMRC ruled that PSCs were specifically being used as tax avoidance vehicles, which led to the implementation of the off payroll working rules (IR35) in 2000, designed to address ‘disguised’ employees.
In 2017, the IR35 rules were amended. Public sector organisations were made responsible for determining the employment status of those they contracted via PSCs and for paying the income tax and NIC for those deemed to have employee, rather than self-employed status.
From April 6th, this requirement is being extended to large and medium-sized businesses in the private sector.
What now for employers?
All client companies in the private sector will have to comply, unless exempted, by meeting at least two of the following criteria:
1. An annual turnover of less than £10.2m
2. Balance sheet total of less than £5.1m
3. Fewer than 50 employees
Non-exempt organisations must determine the nature of the employment relationship they have with their contractors. This has proved key in a number of recent challenges brought by HMRC, and the four main principles on which the relationship will typically be judged are:
What control do you have over the contractor (e.g. what, how, when and where they work)?
Can the contractor substitute a suitably qualified person to act in their place?
3. Financial risk
How much financial risk is borne by the contractor?
4. Mutuality of obligation
Are you obliged to give the contractor work and are they obliged to accept any work you give them? (HMRC’s online test to check employment status, CEST, doesn’t consider Mutuality of Obligation, assuming that it exists in every contractor engagement).
Having assessed the employment status of their contractors, the organisation must issue them a ‘Status Determination Statement’ (SDS) which confirms whether the contractor is genuinely self-employed or now considered an employee, giving reasons for the determination.
HMRC will deem the client company liable for tax and NI contributions until the contractor (and agency or other organisation that contracts with the client company) is told of the status determination and reasons for it. When the contractor is deemed to have employee status, subject to tax and NI contributions, both parties will need to consider how to deal with the additional tax cost.
Companies must ensure their systems are structured appropriately for IR35 and create a system for addressing any challenges raised by contractors in terms of the employment status determination, with legal advice a helpful step in getting things right.
Drawing the right conclusion
If your organisation is actively employing the services of contractors or you’re a freelancer providing services to businesses, either directly or via a PSC, then it’s in your best interests to brush up on the IR35 rule changes and review the terms of any existing engagements thoroughly.
Client companies are liable for tax and NI contributions until they tell the contractor and the person the contractor contracts with, of its determination and the reason for it. HMRC shows no sign of softening its stance towards those it suspects of tax avoidance and it will be learning from experience to improve its future success rate in court.
Don’t be tempted to bypass IR35 by other means and treat any advice to implement a tax avoidance scheme with considerable caution, as most don’t work and don’t have HMRC’s blessing.
If you’re unsure about any of the rule changes and require legal support to ensure compliance, then contact an experienced team of lawyers to adjust your processes accordingly.
Get more details about Wright Hassall and its taxation services for businesses by clicking here