What is IR35 

IR35 also known as the Intermediaries Legislation and the Off-payroll working rules was implemented in 2000 as part of the Finance Act. 
Its intention is to prevent tax avoidance by those working on contract through an intermediary company, such as a personal service company (PSC). The legislation states IR35 applies where “the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client.” 

In other words, if the PSC was hypothetically removed from the chain of supply would the contract be considered an employment relationship and subject to income taxes.
 

The legislation was introduced to prevent employees leaving their employment, only to return shortly after to perform the same or similar role as a contractor through an intermediary which no longer is subject to employment taxes.

When those working through a PSC are caught by IR35 the contract role is deemed an employment relationship and subject to income tax and employee/employer NICs. If a worker is caught inside of IR35 they are called a ‘disguised employee’ and must apply full PAYE taxes to the gross income. This can reduce a PSC workers income by up to 25%.

Currently and until April 2020 the worker is responsible and liable for assessing and applying the IR35 rules and applicable taxes. 

What is changing in April 2020?

From 06 April 2020 you; the client will be responsible for assessing each contract role under IR35 and to inform the agencies recruiting the role of the status.

There are two status options;
 
1. Outside of IR35: the role is a genuine contract role, PAYE taxes to not apply
2. Inside of IR35: the role is considered to be disguised employment, PAYE taxes do apply
 
The recruitment company you pay (termed the ‘fee payer’ in the legislation) must be informed of your status decision. The agency is then 
responsible for applying any applicable taxes from the fees you pay them. If they do not, they are liable for unpaid taxes, HMRC fines etc. 
If you, the client do not adhered to certain rules, you will take on the responsibilities of the Fee Payer aka liable for taxes, HMRC fines etc. 
To ensure this doesn’t happen the legislation asks several things of you:
 
1. You must use reasonable care in your status assessments. There is little guidance from HMRC on what they consider is ‘reasonable care’.     We recommend you assess each role on a case by case basis, keep records and document your decision-making processes. 
2. You must inform the agency of the status decision before the start of the assignment 
    (although we would prefer the decision sooner for practical reason)
3. Answer any questions from the agency about the decision within a set timescale (timescales not yet confirmed)
 
From April 2020 the worker will have no liability for unpaid taxes.
 
The worker is not automatically entitled to employment rights because they fall inside of IR35, they do not become an employee of yours, 
the only change is the amount of taxes that apply to the fees. 
 
The changes will not be applied retrospectively. 
 
The exception:
 
Small organisations as defined in the Companies Act 2006 are except from this change in legislation and will not have to make IR35 assessments on contract roles:
 
Companies Act definition of “qualifying as small” 
 
The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements — 
 
1  Annual Turnover Not more than £10.2 million
2  Balance sheet total Not more than £5.1 million 
 

How this affects you?

Just as you do now, you will need to consider each new role in terms of how the work will be managed, the deliverables, role description etc. 
However, you will need to measure these factors against the IR35 rules.

HMRC have produced a tool to use for employment status assessments. This is a set of multiple choice questions (a link to tool is in the references section below). The tool has been heavily criticised and is currently undergoing improvements by HMRC. 
As such we would not recommend you rely solely on the tool but also consider case law. 

It is very difficult with any level of certainty to produce an ‘outside IR35’ status decision, HMRC themselves struggle, having lost many cases in court. 

However, there are some prevailing factors to consider:

                                                                                                                 Factor                                                                         Application
Mutuality  of obligation (MOO) There should be no obligation on the client to provide work and 
equally no obligation of the worker to accept any work offered by the client.
All Computappoint PSC agreements are non-MOO agreements 
Personal Service/ 
Right of substitution
Any worker should be easily substituted for another suitable worker if required. They should not be providing a ‘personal service’. 
For example, you book a boiler service with a plumbing company, you are told Bob is to be the visiting engineer, but on the scheduled day Bob is unable to attend, so the company sends Tracey instead. Bob has been substituted for Tracey; therefore, this would not be classed as providing a personal service.
All Computappoint PSC agreements contain a right to substitute clause.
Financial liabilities As the worker/PSC is in business in their own right, there should be financial risks; risking their own money to providing services through a business. For example, are they under warranty to correct errors, do they hold professional indemnity insurance, are they paying for their own training and/or buy assets to do the job? 
Computappoint agreements include warranty’s and a workers first payment through us is subject to providing a copy of their professional indemnity insurance.

                    BYOD                     

Is the worker able to use their own equipment and devices to provide the services? This will obviously be considered under the circumstances, as some situations particularly in IT will require workers to use the client’s equipment rather than their own.
Control The worker should be able to decide what, when, where and how to 
perform the services to the client. The worker should know how to do their job from day one and will not require training or instruction on their skill set.
Employee benefits         A worker must stay independent from the client’s employees. Workers should not be invited to employee social events, such as the Christmas party. They should not be entitled to employee benefits and discounts.

What should you be doing now?

Talk to your recruitment suppliers about the measures they are implementing and what steps they are taking to be compliant. 

Familiarised yourself with the legislation and case laws (useful links provided below). 

Practice using the HMRC CEST tool https://www.tax.service.gov.uk/check-employment-status-for-tax/setup Look at other assessment tools such as the free, extensive test produced by Contractor Calculator https://www.ir35testing.co.uk/TakeTheTest

Talk to your legal team about liabilities and internal processes or seek advice from a specialised service provider. 

The rules will apply to current workers if they are still on site in Apr 2020, so consider how they are managed and if this needs to be 

    adjusted? 

Talk to Computappoint about how we can assist you and the best way we can work together for an easy transition in April 2020. 

 

Useful References

 

Link to the legislation Income Tax (Earnings and Pensions) Act 2003, Chapter 8

https://www.legislation.gov.uk/ukpga/2003/1/part/2/chapter/8?view=plain

 

Government page on the IR35 changes

https://www.gov.uk/government/consultations/off-payroll-working-in-the-private-sector

 

Link to the consultancy paper published March 2019 

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/783409/Off-payroll_working_rules_from_April_2020.pdf

 

All information is provided for information purposes only. Every effort is made to ensure that all information given in this document is accurate, but no responsibility or liability can be accepted by any member of Computappoint Limited for any errors or for any loss from use of this publication or any of the information or data contained herein.

 

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