IR35 rules are changing in April 2021 – if you run a business using associates and contractors this will this affect you. And, perhaps more importantly, this will affect various departmental budgets in relation to staffing – or even legal – costs.
There is a lot of confusion over how IR35 works and who it applies to, if you think this might be you then read on whilst we explain how to plan so you are not caught on the hop.
What is IR35?
Unfortunately, this is where tax law hits the HR Department right between the eyes! HR is usually one step removed from all things tax, but not in this case. IR35 is tax legislation, set out within the Finance Act. It first came into law in April 2000 and is changing again in April 2021.
You might have heard some call this IR35 legislation ‘Intermediaries Legislation’. IR actually stands for Inland Revenue. Before the Inland Revenue was renamed HMRC. The 35 just relates to the Inland Revenue publication number.
Ahead of April 2021 HMRC are already making loud noises….
Financial Times 27/8/19: GlaxoSmithKline is at the centre of a crackdown on IR35 rules after HMRC wrote to 1,500 of its self-employed contractors accusing them of being ‘disguised employees’ and seeking to avoid tax.
Risk Assessment Needed?
Are your contractors being targeted too? Perhaps you will need to be proactive in giving them information/advice just in case a few too many get scared by perceived HMRC threats and walk away early from their contracting arrangements?
If you understand how many contractors you have and in what areas of your operation they work, you might find it beneficial to do a quick audit to identify any risks to continuity in the business if they do walk away.
The UK has around 150,000 people working as contractors likely to be affected by this change. HMRC estimates that up to 90% of these will experience reduced earnings as a result of the changes.
What does the tax legislation relate to?
Going back to basics for a minute, let’s take a look at what this legislation is.
IR35 is about the taxation of those who are self employed, but not operating (in the eyes of HMRC) a genuine business. An example might be a business consultant who only has one client, cannot substitute in a colleague to do the work for them, who works on their premises every day, uses the organisations’ tools and equipment and is to all intents and purposes a worker for that business.
Whilst lots of individuals consider themselves self employed and as a result consider themselves ‘outside’ the rules of IR35, the government is beginning to take a different view and, after a clampdown on individuals working in the public sector a few years ago, is now turning its attention to the private sector. Many self employed workers currently ‘outside’ the rules of IR35 will soon find themselves considered to be ‘inside’ the rules, with a consequential change in tax treatment (this will not give them the usual employment rights though so it’s a lose/lose for contractors).
The IR35 legislation specifically seeks to combat tax avoidance by workers who are working through an intermediary such as a limited company. HMRC often calls these workers ‘disguised employees’ and views such arrangements as hugely impacting the tax revenues it is able to collect.
Why is HMRC pushing these changes?
In a nutshell, it’s anticipated that these changes will bring in over £3billion additional tax revenue in the first 4 years. Not to be sniffed at and you can understand from this why they are ‘eager beavers’ to get this implemented as fast as possible.
Why are contractors and employers not happy about these changes?
Contractors, i.e. those outside IR35, have three major advantages: they typically charge more, they pay less in taxes, and they can deduct their expenses thereby reducing their tax burden even further.
You may have heard about the ‘24 month rule’? This allows contractors on contracts of less than 24 months to claim travel expenses between their home and their client’s premises. In contrast, no employees (other than home workers) are able to offset their home to work travel expenses against their tax burden.
Many contractors will be up to 20% worse off due to increased tax and NI payments once these changes are implemented.
What this means for HR and Payroll
You first need to assess who should from April 2020 be classed as ‘inside’ IR35.
Then you must write to those whose status needs to change, advising them of what you are doing and why and setting out how they can challenge your decision. If you haven’t already done this you can download our IR35 guidelines, checklists and letters from our template HR document site, membership required.
Once confirmed that a contractor falls ‘inside’ IR35, you will have to put them on your payroll, where national insurance and income tax will be deducted before payment made.
Note: You need to be aware that as a result of their tax status changing they may consider themselves to be, in all but name, an employee, so may begin to push for full employment rights. Are you ready for this?
HMRC/tax status appeals
Despite consultation highlighting a need for an appeals procedure, HMRC has said “Those who wish to challenge their employment status for tax can take their case to an employment tribunal, regardless of their tax status.”
If you wish to take a practical approach in your organisation, we therefore suggest you have an internal appeals procedure before final decisions are made about who to put on your payroll as there is no benefit to anyone in battling it out through the Courts.
What cost of appeals going to the Employment Tribunal?
In saying that contractors treated as ‘inside’ IR35 should now sue their employers to establish actual employment status if they are dissatisfied with decisions taken, we would question whether that just means that HMRC is passing off cost they should bear for appeals onto employers?
If this is the case then perhaps HMRC thinks they deal with real money whilst employers play with monopoly money – just reach your hand into the tray to grab another handful when what you had has run out? Easy, peasy!
But no money is Monopoly Money and it is a rare employment claim that costs an employer less than £10K to defend (and can be up to £50K at times).
We would also ask what cost to the Tribunal Service that already doesn’t seem able to cope (in our experience) following removal of the tribunal fees – our clients are forever being bumped or having court dates cancelled and being offered dates 6+ months on. The Tribunal System, in our view, is seriously under resourced and has no capacity to deal with the increased workload that disputes with HMRC about employment status will bring.
So, in conclusion….ahead of April 2021
- Audit your business if you use ‘self-employed’ contractors.
- Talk to Payroll to ensure they know what is coming their way.
- Assess if their tax status needs to change by April 2021.
- Start consulting and communicating with those who many be affected (keeping your managers in the loop on this too).
- Create a clear internal appeals process for any tax status challenges.
- If you employ contractors, consider next year’s budget. Contractors will be feeling the pinch and pushing you for more money (and remember your own NI will be increasing too).
- Identify whether there is any value in giving your ‘inside’ IR35 contractors employment rights when they begin to be paid through payroll.
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Disclaimer: The information contained within this article is for general guidance only and represents our understanding of employment and associated law and employee relations issues as at the date of publication. Jaluch Limited, or any of its directors or employees, cannot be held responsible for any action or inaction taken in reliance upon the contents. Specific advice should be sought on all individual matters.