human resourcesRecruitment

IR35 – What is it and why do I need to know about it?

It’s less than 2 weeks until the Chancellor reveals his latest budget and as such Pre-budget rumours are all over the news. With the Government already promising an additional £20 billion increase to the NHS budget, we can expect a combination of tax rises and budget cuts to form the large part of the announcement. One of the key policies that could be introduced concerns extending IR35 to the Private Sector.

What is IR35?

IR35 was introduced to the Public Sector in April 2017 and was designed to prevent people who should be classed as employees avoiding the payment of PAYE by delivering their work via a Personal Service Company (PSC). The Gov.uk website describes it as such:

"A worker is involved in off-payroll working when they work for a client through their own intermediary, often a personal service company (PSC), but would be an employee if they were providing their services directly.

As off-payroll workers are paid through their own intermediary, they pay Income Tax and National Insurance contributions (NICs) in a different way to an employee.

The off-payroll working rules are in place to make sure that where an individual would’ve been an employee if they were providing their services directly, they pay broadly the same tax and NICs as an employee".

www.gov.uk

How will it impact me?

The regulations have impacted the treatment of workers and if IR35 is extended to the private sector then the financial cost to employers could be significant. 

As it is the employer who is responsible for determining the status of their workers, each employer will need to assess the level of risk to their own organisation. When it was introduced to the Public Sector, it resulted in many former contractors being converted into employees. This resulted in some contractors outright refusing to work for bodies who classed them as employees and still more demanded huge pay rises to go permanent. Clearly as all sectors would now be covered by the regulations (should the proposal go ahead), the contractor’s room for manouvre is somewhat limited but employers could still lose talent if they take a draconian line.Many bodies elected to take a blanket approach and assume all contractors were employees, mainly due to the short window between the draft legislation being released and the implementation date. If the Government decide that 6 April 2019 is to be the implementation date, then this could be a decision that many private sector businesses take. 

What test should I apply?

The Government have provided an on-line tool (available here) to help you determine whether your contractor should be an employee. However, HMRC have been accused of not knowing their own rules and the tool itself seems to conflict with case law. PwC provided the following guidance which is a good rule of thumb when determining employment status:

Control. Is the employer providing direction or supervision of this individual? Are they being micro-managed, given tasks to perform, and are they subject to performance reviews?
 
Risk. Is it possible for the individual to make a profit or a loss, what is the financial risk?
 
Integration. Is this individual part of the organisation? Do they have a company email address, telephone number, are they able enter the organisation using a company pass and do they feature in the organisation’s structural chart?
 
Substitution. Can an individual genuinely substitute themselves without authorisation from your organisation? If they have substituted who did the organisation pay – the original PSC or the substitute? 
 
Provision of owning equipment. Can this individual supply their own equipment such as a laptop or phone, or do you provide it for them?
 
The more distance there is between the way you treat employees vs contractors, the more likely that the contractors will fall outside of IR35.

What should I be thinking about now?

Clearly the budget hasn’t happened yet and we don’t know for sure that IR35 will be extended. However, in our opinion, it is unlikely to remain just a Public Sector rule forever. It may be worth starting to think now about how you engage contractors. Do you use them for specific pieces of work or to plug long term gaps? Are you beholden to one person or could you outsource the work to a consultancy who could provide substitute workers of equal calibre? This and many more questions will need to be answer if and when the Chancellor makes his next move. Watch this space….

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