Compliance / The IR35 Reform – employers' tax liabilities are changing, are you prepared?
November 5, 2019
There are important tax legislation changes coming in April 2020. If you are a medium or large sized business in the UK and use contractors to support and enhance your project capability, then the changes will have a significant impact.
From next spring, your business will be responsible for providing an employment “Status Determination” to your contractors, recruitment agencies and anyone supplying your business “off-payroll” workers.
The changes are only 6 months away. If you haven’t taken steps to prepare, then you’re probably a little behind. But you’re not alone.
There is a widespread lack of readiness across most sectors in the UK. In fact, our research indicates that most HR departments are lacking the knowledge to navigate these changes. Not really a surprise given that the liability has historically sat with the contractor.
But it’s not all doom and gloom. We believe that IR35 presents opportunities. With a sensible and well thought out plan (and a bit of effort), these changes will ensure you are best placed to capture the top consultants and specialist skills in your market.
IR35, what is it?
IR35 was introduced in 2000. It’s a set of UK tax rules stating that contractors providing services through an “intermediary” are required to apply to their contract assignments to determine if the revenue gained from the contract is subject to full income tax and National Insurance Contributions - as if they were employed by the client.
The intention is to ensure that contractors working as ‘’disguised employees’’ pay HMRC broadly the same tax and NICs as if they were employees.
As it stands, the HMRC and HM Treasury believe that many contractors use their limited company to disguise their actual employment with their clients in order to be more tax efficient.
However, it’s important to note that the changes are not designed to penalise or impact contractors providing services in a truly independent fashion.
Does this apply to your business?
If your business is in the private sector and meets two of the three qualifying criteria below, then the IR35 changes will apply to your organisation:
- Turnover of £10.2m or above;
- £5.1m or more on your balance sheet;
- More than 50 employees.
If you don’t meet two of the criteria, then you are classed as a “small business”. This means that you’re excluded from the changes and the contractor remains responsible for IR35 - as they are today.
What does the Reform mean?
The Reform doesn’t change the IR35 tax rules. But it does mean a shift in the employment status responsibility and therefore the liability from the contractor, to the organisation receiving the contractors’ services.
What are the risks?
Failure to correctly determine whether a contractor falls ‘’inside’’ or ‘’outside’’ will result in organisations being liable for the underpayment of the tax and National Insurance Contribution of the contractor, plus likely fines levied from HMRC.
Since 2000, IR35 cases brought to the Courts by HMRC have been largely unsuccessful. But these legislative changes are clearly expected to provide HMRC larger and easier targets to investigate. And HMRC and HM Treasury will take a very unforgiving attitude towards tax evaders.
What are the challenges?
- Organisations will likely lack the knowledge and skills internally to establish an IR35 strategy.
- Responsibility and ownership of IR35 will likely sit with HR, despite the project falling outside a typical HR team's remit.
- Compliance will require education and collaboration, with the project itself including internal departments such as HR, Procurement, and the Hiring Community as well as partners and contractors.
- The involvement of multiple stakeholders increases the risk that the correct Status Determination may not make its way down the supply chain.
- Changes in IR35 Status could mean the cost of contractors to organisations will increase.
- HMRC have discouraged a blanket approach to compliance. In fact, organisations adopting a ‘one-size fits all approach’ are likely to be viewed as uncompetitive.
- There is currently a lack of clarity from HMRC and some grey areas.
- Under the changes, contractors have the right to appeal your decision and organisations are required to respond in writing within 31 days.
Let us help you with IR35
It might be that you’re still trying to make sense of IR35 or need a hand devising a strategy. Or maybe you just want someone to help with the heavy lifting, in a clear and logical way.
Regardless of where you are with IR35, BPS World can help. We have a dedicated compliance team with expertise in IR35 and are working hard with our clients to make sure they’re ready.
Our aim and belief is that the companies that understand IR35 and embrace the changes will make themselves far more attractive to genuine, professional contractors.
If you’d like some help with IR35 or want to learn more about us, get in touch for a free, no obligation consultation. You can get reach me on +44 7887 564816 or you can email me at: email@example.com.