Law 365 explains IR35 - What you need to know
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IR35 legislation has been around for over 20 years. It was introduced in April 2000 when HMRC wanted to tackle people taking advantage of a tax “loophole” by using freelancers and contractors via limited Personal Service Companies (PSCs). It is aimed at ensuring the right tax and NI contributions are being paid. IR35 is also referred to as the “Off Payroll” working rules but in fact they’re not quite the same. Off payroll in the private sector only applies to ‘medium and large companies’ with a UK connection (more on this later) from 6 April 2021. IR35 applies to small private sector client companies from April. HMRC believes an estimated £700 million p.a. of revenue is being lost due to contractors working as “disguised employees” and not paying the right tax and NICs. This sum could grow to an incredible £1.3 billion by 2023-24. IR35 changes were initiated in the public sector in 2017 and the government is now turning its sights on the private sector with the hope that it can bring a much needed boost to the Government’s funds.
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Law 365 explains IR35 - What you need to know
- 1. IR35 - What youneed to know Kim Simmonds, Megan O’Hara
- 2. What we will cover today 1. What is IR35? 3. Why and what is changing ? 2. Who do the changes impact? 5. ITEM 05 4. What do Microso ft Partner s need to do? 6. How are Microso ft Partner s dealing with the changes ? What happens if I do nothing ?
- 4. What is IR35? • Legislation designed to close a tax loophole. • Companies using contractors pay less tax • No employer’s National Insurance contributions (13.8%), no apprenticeship levy, no employee benefits • Contractors pay less tax • Often pay less tax as can offset expenses or pay tax on dividends at a lower rate than income tax Legislation designed to ‘catch’ long-term contractors that are working and treated almost the same as employees so are deemed or ‘disguised employees’
- 5. Who does it impact? Changes come into effect 6th April 2021
- 6. Who does it impact? The end client must decide if the contractors working for it are disguised employees. Two example scenarios. James Smith Individual IT Contractor James Smith IT Limited Intermediary/PSC Supreme IT Services Client and Fee Payer Jane Trent Individual Contractor Jane Trent IT Limited Intermediary/PSC Best Microsoft Partner Ltd Fee Payer Customer of Best Microsoft Partner Client Only applies to medium and large businesses with a UK connection – must meet 2 or more of: Annual turnover exceeds £10.2 million Balance sheet exceeds £5.1 million Over 50 employees
- 8. Why is the law changing? HMRC believes an estimated £700 million p.a. of revenue is being lost due to contractors working as “disguised employees” and not paying the right tax and NICs. This sum could grow to an incredible £1.3 billion by 2023- 24. IR35 changes were initiated in the public sector in 2017 and the government is now turning its sights on the private sector with the hope that it can bring a much-needed boost to the Government’s funds. The new rules are called the Off Payroll rules.
- 9. What is changing? • It used to be up to the contractor to decide if they were a ‘disguised employee’ and deal with any tax and NI due, • Now it is the responsibility of the client to decide and the fee payer to deduct the correct tax/NI. Take the example of Ted: Ted started working for you in 2018. He came in as a contractor through a PSC to project manage X as a one-off short-term discrete project. He also worked for other businesses in 2018. However he has been pulled onto other projects for you ever since, and is now working on a full-time basis with you. He doesn’t have time to work for any other clients. You realise upon review of the whole picture that Ted now looks a lot like a “disguised” employee. You may not even have noticed it happening, but there’s little doubt he’s now one of the team. If you are paying Ted’s PSC you will now be responsible for deducting tax and NI from those fees now you have assessed his status. Ted’s PSC would have taken care of this before the new April changes.
- 11. What do you need to do to prepare? Audit What contractors do you have, what services are they providing and to whom? HMRC’s CEST tool can be useful to assess status Update T&Cs Check: how much control over the contractor is built into the contracts – can it be reduced? What does the right to substitution look like – is it absolute? Communicate Talk to any individuals that are likely to be affected by the changes. Come to an agreement about the most suitable way forward. Prepare Processes You’ll need to collect info from clients assessing status of contractors and also from PSCs about the individual contractors if you are going to deduct tax and NI. You’ll need: Full name. Date of birth. National insurance number. Get Advice Ask professionals like Law365 if you’re unsure how to assess your risk and how to determine a contractor’s status.
- 12. How are other Microsoft Partners dealing with this?
- 13. What are other Microsoft Partners doing? 1. All of them are updating their contracts with any contractor PSC to ensure that the contract is ‘IR35 proof’ – assuming the underlying service is not a disguised employee e.g. that they can and do substitute staff, etc. 2. Some of our clients are turning to umbrella companies to handle their resourcing needs. This has several benefits: • Delegating the additional administrative requirements arising out of IR35 is appealing. • They want to protect themselves from liability. A wrong decision about the status of a contractor could leave you exposed. If HMRC challenge it, there’s risk of a tax bill and associated penalties. • Umbrella companies can employ the individuals and take on some of the associated costs (NI, apprenticeship levy, and the provision of employee benefits) and “hassle” of using contractors What is being asked of Microsoft Partners by their customers? Some Microsoft Partners’ customers are requiring contractors supplied via PSCs to be pulled out of the service chain entirely – as they do not want any possible liability. Others are asking for all contractors to be identified and for the partner to show that the correct tax is being paid, so they are not liable as the end client, which is an administrative burden and can make margins very transparent.
- 14. What happens if I do nothing?
- 15. What happens if I do nothing? • You could end up responsible for the payment of tax and NICs if you are the end-client and you delay the status determination • You could be asked to pay backdated tax and NIC as well as penalties • You could face a lengthy and time-consuming tax investigation
- 16. Call us if you would like any help Kim Simmonds CEO kim@law365.co Megan O’Hara Employment Lawyer megan@law365.co
- 17. Law 365 specialises in helping Microsoft Partners grow their business with less risk Call us for a no obligation chat, or a free audit of your current commercial and HR legal documents and processes. We will help you speed up your sales process with less friction in the contract and SoW process. We will negotiate better deals for you so you make more profit. Let us help you grow. hello@law365.co 0208 132 6943
- 18. Thank you
Editor's Notes
- IR35 legislation has been around for over 20 years. IR35 was introduced in April 2000 when HMRC wanted to tackle people taking advantage of a tax “loophole” by using freelancers and contractors via limited Personal Service Companies (PSCs). IR35 is also often referred to as the “Off Payroll” working rules but in fact they’re not quite the same. Off payroll in the private sector only applies to ‘medium and large companies’ with a UK connection (more on this later). IR35 applies mainly to small private sector client companies. There are numerous benefits for companies who hire contractors instead of taking on full-time employees: They don’t have to pay employer’s National Insurance contributions (13.8%), the apprenticeship level or offer employee benefits It allows them to be more agile when responding to changes in demand for their services as the contract workers were easier to let go These benefits will still apply for people who are legitimately self-employed, but what often happens is that contractors become ‘part of the furniture’ and move to becoming almost the same as regular employees. These “disguised employees” - the ones working like employees - are the ones you need to examine more closely.
- So it affects the client if they are a medium and large private sector business with a UK connection who employ contractors through intermediaries - often PSCs. What is medium or large? (they must meet 2 or more of these criteria) Annual turnover exceeds £10.2 million Balance sheet exceeds £5.1 million Over 50 employees
- Why are there changes to IR35? HMRC believes an estimated £700 million p.a. of revenue is being lost due to contractors working as “disguised employees” and not paying the right tax and NICs. This sum could grow to an incredible £1.3 billion by 2023-24. IR35 changes were initiated in the public sector in 2017 and the government is now turning its sights on the private sector with the hope that it can bring a much needed boost to the Government’s funds
- The focus remains on whether contractors working for you should be treated as self-employed or as an employee (for tax purposes). This used to be the individual contractor’s responsibility. Now, if you’re the one using the services of the contractor, it’s up to you to decide and document the contractor’s employment status – Take the example of Ted: Ted started working for you in 2018. He came in as a contractor through a PSC to project manage X as a one-off short-term discrete project. He also worked for other businesses in 2018. However he has been pulled onto other projects ever since on a full-time basis with you and now doesn’t work for any other clients. You realise upon review of the whole picture that Ted now looks a lot like a “disguised” employee. You may not even have noticed it happening, but there’s little doubt he’s now one of the team. If you are paying Ted’s PSC you will now be responsible for deducting tax and NI from the PSC fees. Ted’s PSC or another intermediary would always have taken care of this before the new changes coming in if Ted had decided he was a disguised employee.
- there will not be a “one size fits all” scenario. Audit Carry out due diligence. What contractors do you have, what services are they providing and to whom? The HMRC’s CEST tool can be a useful starting point for assessing status. Consider updating Ts & Cs Check how much control over the individual contractor is built into the contracts – could this be reduced. What does the right to substitution look like – is it absolute? Communicate Talk to any individuals that are likely to be affected by the changes. Come to an agreement about the most suitable way forward. Prepare internal processes You’ll need to collect info from PSCs about the contractors if you are going to deduct tax and NI: Full name. Date of birth. National insurance number. Bank account Take professional advice For example, if you’re unsure how to assess your risk and how to determine a contractor’s status.
- Many of our clients are turning to umbrella companies to handle their resourcing needs. Why? Delegating the additional administrative requirements arising out of IR35 is appealing. They want to protect themselves from liability. A wrong decision about the status of a contractor could leave you exposed. If HMRC challenge it, there’s risk of a tax bill and associated penalties. Umbrella companies can employ the individuals and take on some of the associated costs (NI, apprenticeship levy, and the provision of employee benefits) and “hassle” of using contractors especially as some Microsoft Partners’ customers are requiring contractors supplied via PSCs to be pulled out of the service chain entirely
- What happens if I do nothing? You could end up responsible for the payment of tax and NICs if you are the end client and you delay the status determination You could be asked to pay backdated tax and NIC as well as penalties You could face a lengthy and time-consuming tax investigation