The IR35 tax change comes into force in April 2020. HMRC has promised to introduce an updated tool by the end of 2019 to make the process clearer and reduce errors but the Federation of Small Businesses (FSB) continues to call for a delay to the April 2020 rollout.
The FSB joined the Institute of Chartered Accounts in calling on the Government to reconsider the implementation of IR35 because some small businesses simply were not ready for the rule change.
So what is IR35 and what does your SMB need to know before the 2020 deadline?
What is IR35?
IR35 legislation was introduced in April 2000. Targeted at individuals who provide their services via a personal service company (PSC), it aimed to prevent abuses of the system and stop individuals claiming tax relief when they would usually be treated as an employee.
Contracts that are investigated by HMRC and ‘caught’ by IR35 will be subject to a deemed payment. All income is treated as salary and therefore subject to tax and NIC.
Understanding IR35
You may be affected by IR35 if you are:
- A worker who provides your services via an intermediary
- A client who receives those services
- An agency providing a worker’s services through their intermediary such as a PSC, partnership or as an individual
The IR35 rules are applied to ensure that contracted workers who would otherwise have been directly employed pay roughly the same tax and NIC as other employees.
Establishing your status
Currently, a PSC is responsible for determining the status of a worker. In the private sector, that responsibility falls to the intermediary to determine the status for each separate contract.
After April 6, 2020, those rules will change:
- All public sector and medium-large private sector clients will be responsible for determining if the rules apply
- If services are provided for a small private sector client, the intermediary will continue to determine employment status and whether the rules apply
The simplified test suggested by HMRC for a client says you must apply the rules if your annual turnover exceeds £10.2 million.
For a PSC, IR35 rules only apply if [5]:
- You or your family own more than 5% of the ordinary share capital
- You or your family are entitled to more than 5% of any dividends
- You are in a position to receive benefits or payments that are not salary
For a partnership, the IR35 rules apply if:
- You or your family are entitled to 60% of the profits
- Work for one client generates most or all of your income
- Your profit share reflects payments received where IR35 rules apply
You can also check your status for tax with HMRC and to assess your risk of an investigation.
Compliance checklist
As a general rule, IR35 doesn’t apply to the provision of services. Check whether the following terms appear in your contract:
- Terms such as ‘control’, ‘direction’ and ‘supervision’ imply that your client has control over your work and therefore employs you
- Substitution: if no one else could complete the work, IR35 rules will apply
- Mutuality of obligation: if the employer is obligated to offer work and you have to accept it, the work will fall within IR35 rules
Other IR35 compliance issues to consider include
- Equipment: if you don’t use your own equipment but rely on that provided by an employer you could be considered as a disguised employee
- Business ‘on your own account’: if you have a website, office and employees you’re not operating as an employee
- Intention of the parties: the contracted relationship between contractor and client should genuinely be one of supplier and customer
- Part and parcel of the organisation: if the contractor becomes embedded in the company structure then IR35 rules will apply
- Exclusivity: a typical self-employed contractor will work for several clients at once
- Payment: typically a self-employed individual will be paid on a project basis not hourly, weekly or monthly
- Financial risk: a self-employed contractor will be responsible for a level of financial risk in the operation of their business
- Right of dismissal: where an employee would have the right to be given statutory notice, a self-employed contractor can be dismissed if they break their contract
The cost of non-compliance
If HMRC successfully argues that IR35 rules apply, you will be assessed for additional tax. If you don’t demonstrate due care when assessing the status of an assignment HMRC could apply up to a 100% penalty on the additional tax.
HMRC charges tax on underpaid tax from the due date of
payment, and is also payable on surcharges and penalties paid late. The
situation changes for corporation tax self-assessment where different interest
rates apply.