What is IR35?
The Intermediaries Legislation (IR35) was introduced in 2000 and aimed to remove the tax advantage of providing services via a limited company where it could be proved that were it not for the limited company, the actual business relationship between the contractor and the hiring organisation would be one of employment.
The underlying rules themselves will remain the same, what will change is the responsibility for assessing IR35 status will move from the individual limited company / PSC to the hiring organisation (the end client), and the responsibility from making the deductions and payments of tax and national insurance contributions will move to the recruitment business or hiring organisation that pays the limited company. This change has already taken place within the public sector and is now planned to be extended into the private sector in April 2020.
The key difference is that the public sector reform was a blanket approach, whereas the private sector reform is to only affect ‘medium’ and ‘large’ businesses. The ‘small’ businesses that will be exempt from the new responsibilities are widely thought to be defined as;
• Turnover of £10.2 million or less.
• £5.1 million or less on its balance sheet.
• 50 employees or less.
It’s important to note, the size of the business relates to the hiring organisation that the contractor is providing services to, not the recruitment business that is sourcing the work and making the payments.
If the hiring organisation is ‘medium’ or ‘large’ and the assignment is deemed by them to be ‘Inside IR35’, the new legislation will require the business making the payment (usually a recruitment business) to pay a deemed employment payment to the limited company, making deductions for employers national insurance, employees national insurance and income tax. The limited company/PSC then pays the net amount to the worker as a salary or dividend.
Where did these changes come from?
The introduction of the off-payroll legislation in the public sector in 2017 led to a rise in schemes available which are quite simply, not compliant. These can leave contractors or workers open to personal liabilities on tax. Where recruitment businesses or hiring organisations are recommending these schemes, the Criminal Finance Act is applicable and can result in very large fines and criminal proceedings.
This rise in schemes include a large number that claim to save the recruitment business or hiring organisation money from their employment costs or the end workers tax, but are essentially tax avoidance schemes. Basically, if it seems to good to be true, it probably is!
From April 2020, for any contracts that are deemed to be inside IR35, the safest solution will be to either bring the contractors onto your own staff payroll or to continue to outsource them through a PAYE umbrella company. There are a number of umbrella companies out there that take compliance seriously and Fair Pay Services are one of them. We have strict systems and processes to ensure that all relevant deductions are made and submitted to HMRC each week via real time information (RTI).
What is an umbrella company?
An umbrella company is an employer of contractors and freelance professionals who complete different assignments at various locations for recruitment businesses and/or hiring organisations. The umbrella company enters into an employment contact with the worker, and a service contract with the recruitment business or hiring organisation. As a recruitment business, by ensuring that you are dealing with a reputable organisation that is making the correct deductions, you are protecting your contractors or workers from any challenges for unpaid tax and protecting yourself and your clients from any potential debt transfer or criminal proceedings.
What can I do to protect our business?
You can protect yourself by only dealing with compliant providers and doing your own due diligence checks on any providers that you work with. Specifically, ask to see copies of any service level agreements, contracts of employment, example payslips, marketing materials etc.
Once you decide that you are comfortable with a provider, do regular reviews to ensure that the processes are being followed. Conduct regular spot checks and as part of this, check for proof of the RTI submission for some or all of your workers, audit some payslips and make sure that all of the information tallies up.
A consultation on the implementation of the rules is now underway and findings are likely to be released this summer. While that seems a long way off, businesses would be wise to start considering the impact of the impending changes and start making plans as soon as possible. We will await the detail with interest and advise accordingly once released.