IR35, How It’s Going So Far
So IR35 is now in force, and there are mixed feelings about the changes.
For some employers, this has meant a positive change with their payroll costs reducing, as they no longer need to pay the employment rights of contractors on top of what they would have paid if those people had been employed by them. Others, however, have found that the amount that they were paying contractors was just too high for what they got out of them, and so these new rules mean that they can’t afford to hire anyone anymore.
So for many businesses, especially SMEs, hiring outside of IR35 may not be an option anymore, which will make recruitment even more difficult than it already is. The government seems committed to making things restrictive for both contractors and companies. For this reason, protests and calls for IR35 to be scrapped were made before the legislation came into force.
What Is IR35?
IR35 pertains to the off-payroll working rules set by the Her Majesty’s Revenue and Customs (HMRC) for clients, contractors and intermediaries. These rules came into effect in April 2017 for the public sector. Amendments made to IR35 came into effect in April 2021, expanding the off-payroll working rules to the private sector.
Purpose of IR35
Essentially, the purpose of IR35 is to ensure that the tax amounts and national insurance contributions (NIC) being paid by a contractor and an employee are approximately the same.
According to an HM Treasury Budget Report in 2015, non-compliance with IR35 resulted in costs of over £400 million annually. Amendments made in 2017 and 2021 are thus efforts by the government to collect more revenue and make a distinction between deemed employees and those who are genuinely self-employed. Deemed employees, according to HMRC, are contractors who would be deemed as employees, should they have directly offered their services to a client.
With IR35, the government is making it the private companies’ responsibility to assess whether a contractor would have been categorised as an employee if they provided their services without an intermediary.
Inside or Outside IR35 HMRC
To fall within the scope of IR35 means that the off-payroll working rules apply to the contractor. There are some guidelines and factors that the HMRC uses to determine a worker’s employment status. Below are some of them:
- Office-holding position – If the contractor is an officeholder and their service is required, IR35 rules are likely to apply.
- Right to send in a substitute – If a substitution is allowed and personal service from the contractor isn’t required, the worker is likely to fall outside IR35.
- Hiring others – Can you hire someone else to do the work for you, and will you pay them using your funds? If so, you’re likely to be seen as self-employed.
- Control – Your employment status is also affected by how much control you have over the work you do, how you carry out your work as well as when and where the work is done.
- Financial risk – A contractor is more likely to be seen as self-employed if they can incur financial risk due to defective work. Rectifying the work at their own expense and time suggests self-employment.
- Part and parcel – This pertains to the contractor’s integration into a company. The higher the level of integration, the more likely it point to employment.
- Clientele – Those working with multiple clients at the same time are more likely to be running their own business.
If found that a contractor falls within the scope of IR35’s rules and the business failed to classify them as such, HMRC can impose penalties and sanctions that are costly for the business. These include payments for the taxes and NICs due, interest and other penalty fees.
In guidance issued by HMRC, it stated that they won’t charge a penalty if companies “took reasonable care” in applying the IR35 rules but still made a mistake. However, it would still be in the best interests of medium and large-sized businesses, as well as their contractors, to accurately apply the off-payroll working rules.
What Does IR35 Mean for Businesses?
With the implementation of IR35, medium and large-sized private companies are responsible for determining the employment status of contractors for tax purposes. Small businesses are an exemption to this.
If a contractor is providing their services to a small-sized business through an intermediary, then the contractor is the one responsible for determining what their employment status is. If a medium or large-sized business classifies a contractor as falling inside IR35, they’re responsible for deducting income tax and NICs.
IR35 investigations, as well as dealing with the possible penalties and sanctions involved, are costly and time-consuming. Because of this, some businesses have adopted blanket policies where they classify all contractors as falling inside IR35. However, this practice is unwise, as IR35 rules apply on a contract-by-contract basis.
What Does IR35 Mean for Contractors?
On the contractors’ side, being categorised as falling inside IR35 rules means more taxes to be paid. And inside IR35, employment rights such as sick pay or holiday pay and other benefits are not automatically given to contractors. The latest news on HMRC’s IR35 reveals that one-third of contractors have left self-employment because of the recent changes.
- Using the CEST tool: Report findings by the National Audit Office revealed that 21% experienced difficulties in using the Check Employment Status for Tax tool.
- Disputing employment determinations: The same report found that contractors frequently challenged employment determinations. However, according to NAO, a defined legal route for appealing further isn’t provided for the workers disputing their status assessments.
- Rights of contractors: Workers classified as employed for tax purposes have to pay employment taxes, but that doesn’t mean they automatically benefit from employment rights.
- Added burden on clients: For businesses, IR35 rules mean they gain additional administrative and financial burdens.
Almost a year after IR35’s latest amendments came into force, the issues surrounding IR35 persist. At Nigel B Butler Limited, we can assist you in resolving status disputes, determining whether IR35 rules apply to a contract and more.