IR35 challenges workers and businesses … again!

5th December 2019

By Joanne Colwell, Partner

IR35 is hitting the headlines again because responsibility for determining a worker’s status is changing from April 2020.

IR35 is hitting the headlines again, the result of a number of cases this year involving TV and radio presenters.  It shows that the IR35 rules are complicated and open to interpretation even by HM Revenue & Customs.

What is IR35?

IR35 is also known as the “off-payroll working rules”.  It was intended to challenge people who supply services to clients via an intermediary, like a limited company.  But, effectively they were acting like employees of the client.  IR35 has always been a contentious tax and is due to undergo further radical change from April 2020 with far reaching effect.

HMRC designed IR35 to deal with people who change their employment status to avoid paying certain employment related taxes.  They are namely Pay As You Earn (PAYE) and National Insurance Contributions.  If they have IR35 status, these people have to pay broadly the same higher rate amount of tax as if they were an employee with extra rights.   While many people provide their services via their own personal services company, others do so through other means.  For example, a partnership or an unincorporated association or even another person.

What are the changes?

Originally, the person or the intermediary supplying their services had responsibility for determining and deducting the correct amount of tax and NICs.  However, all of this started to change in April 2017.  HMRC made it the responsibility of public sector organisations to determine whether the person they were working with fell into IR35 or not.

From April 2020 this shift in responsibility is being extended to part of the private sector.  The responsibility of determining a person’s IR35 status will pass to the medium and large private sector companies engaging them.  Furthermore, the tax liability will also pass from the person to the organisation paying them.  In some cases this will be a recruitment company.  Naturally, this will make them nervous because the consequences of making a mistake are potentially huge.

People working for small companies will continue to make their own IR35 status determination.  But, they will need to take care when considering if your business is small or not.  Unincorporated businesses can test their size to see if they can be classified as small, and therefore exempt.  Their turnover for the calendar year cannot exceed £10.2 million.  However, these businesses won’t be able to use their accounts unless they have a 31 December year end.

What is likely to happen as a result of the IR35 changes?

HMRC want these people to go on the payroll of the large and medium sized businesses they are delivering services to.  In doing so this will remove any need to consider IR35 rules. However, a person going on the payroll brings other legal obligations, like employment rights.  These medium and large companies will be tempted to treat all their ‘not employed’ people as falling into IR35 to avoid a mistake.  Therefore, there is a real risk that these large and medium sized businesses will lose good people.  This is because the cost to people of falling under the IR35 rules is significant.  Recruitment companies in particular will likely experience fewer people happy to work in this way and may lose business.

How can I work out someone’s IR35 status?

HMRC did develop an online tool “Check Employment Status for Tax” or CEST for short.  Originally intended to help public sector workers to determine their IR35 status, they encourage private sector workers to use it too.  Unfortunately, it overlooks certain key aspects of IR35 legislation and the decisions in the courts of IR35 cases.  Therefore, it has been criticised and regarded by many as flawed.

Various recent cases focusing on media personalities have highlighted that IR35 continues to be contentious.  It is believed that unless there are far reaching changes before April 2020 this looks unlikely to change.  But, above all take professional advice.  Wise & Co has an FAQ that you might find helpful.

Are you affected by IR35?  Let us know your experience.

About the author

Joanne is a tax partner.  She joined Wise & Co in 2002 and qualified as a chartered tax adviser in 2005.  Her role has developed over the years and she combines a highly technical knowledge of taxation legislation with a practical and commercial approach to problem solving.  She regularly advises on the tax aspects of business restructures, mergers and demergers, research and development claims, and the implementation of share option schemes.

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