Finance | UK Business Advisors

IR35 in the Public Sector

How could this affect your business?

Introduction

IR35 is a piece of legislation that allows HMRC to collect additional payment where a contractor is an employee in all but name.

If a contractor is operating through an intermediary, such as a limited company, and but for that intermediary they would be an employee of their client, IR35 applies.

New rules for IR35 will apply from the 1^st of April 2020 in the Private Sector as they have been applied in the Public Sector for the last two years.

Each business needs to assess the Risk and implications of these new rules and make the necessary changes to procedures before early April 2020.

Who will be affected in the Private Sector?

Medium and Large Companies will be the initial target of the IR35 rules and they will follow the rules that now apply in the Public Sector.

Small businesses do not have a definition for IR35 but the definition will probably follow the criteria in Companies Act 2006.

How will IR35 affect your Business?

Changes will affect businesses who engage Personal Service Companies (PSCs) to provide workers. This will include intermediaries including Private Limited Companies, Limited Liability Partnerships and Partnerships. The new rules require the private sector organisation to assess the intermediary to see if the IR35 rules apply to the service contracts they enter into with a PSC.

Where IR35 applies the employer must apply PAYE and NIC deductions to the payment for the worker’s services.

This means that the worker is a deemed employee for tax purposes. This also means that you must also account for Employer’s National Insurance and possibly the Apprenticeship Levy.

These changes will almost certainly increase the operating costs of your business:

As a result of being the Fee payer
Because intermediaries will increase their charges to mitigate the increases in tax and National Insurance.

There is an outstanding consultation on employment status which has had no response from government yet.

We suspect that HMRC will expect businesses to use the CEST test to make the assessment.

CEST is short for Check Employment Status for Tax.

It’s a digital tool designed by HMRC to help public authorities decide if a worker falls inside or outside the scope of IR35

When to use the tool

Use the tool to check employment status when:

you are hiring a worker directly
you or the intermediary you work through accepts a new engagement with a client
you are a public authority or limited company hiring a worker and paying for the services of a worker who works through an intermediary
you are an agency or other third party supplying a worker who works for a public authority through an intermediary
there has been a change to an existing contract or service agreement
your worker disagrees with a determination you have provided them

Choose answers that best match the usual working practices of the engagement.

Before you start

You will need to know:

details of the contract
the worker’s responsibilities
who decides what work needs doing
who decides when, where and how the work is done
how the worker will be paid
if the engagement includes any corporate benefits or reimbursement for expenses

If you do not know who the worker is, the tool will not ask questions about the worker’s circumstances. You will still get a determination that HMRC will stand by.

Preparing for IR35 in the Private Sector

The new legislation comes into force in April 2020 which is only a few months away so you should consider the impact on your business and how it will affect your payroll and PAYE compliance procedures.

To start, establish:

The Personal Service Companies you use.
Where you use them I your business.
How you use them
Their importance to the functioning of the parts of your business.
The current contracts you have in place and their Terms of Service.

Once you have this information you should review the contracts to ensure that you comply with IR35.

It is critical that you know which parts of your business are affected by PSC’s as this will affect your business risk assessment.

You may need to renegotiate the contact with the PSC or have to employ a worker to take over the work.

These reforms could increase your operating costs considerably and have an affect on the way your business will operate.

The earlier you start this IR35 assessment the more time you will have to ameliorate the affects of IR35.

How can we help?

UK Business Advisors can work with you and your key suppliers to identify any risks in your business. We can help you assess the financial impact on your business and help you change your operational procedures where necessary to minimise the impact of the new legislation. This will provide a basis for compliance with future changes.

If you need help preparing for IR35 within your business, get in touch with Edward.tudor@hcbusinessadvisors.co.uk to discuss your requirements.

In order to manage your business effectively you need to be sure that it has enough cash to keep trading and that it is running profitably. To ensure this happens, I recommend you review your financial status at the start of each and every business week.

You will have financial records, probably in one of the most popular accounting software packages such as Sage, QuickBooks or Xero. Either your own staff or your accountants will use these to prepare VAT returns and the other legal requirements such as the annual accounts required by Companies House. These accounting systems can also produce many of the essential figures you need to review on a weekly basis.

Additionally, you need to forecast which clients are likely to pay their invoices this week. This is often not the same as those who should pay this week. Accurately forecasting your weekly cashflow is a skill every business needs to master.

Not all of the figures in the list below will apply to all businesses. You need to establish which are relevant to you. For example if your business works by fulfilling orders within 24 hours you will not need a figure for unbilled orders. However if there is a lengthy period between you receiving an order, fulfilling it and then invoicing the client, then you also need to track that information.

Monday Morning Figures

Here are the figures I recommend you track on a weekly basis as part of your Monday review.

Cash Position

Cash at bank
Cash available taking into account overdraft limits and other immediate sources of cash
Likely cash receipts this week. This will not be an exact figure, but your best estimate
Total of payments you expect to make this week

You need these figures to make sure that you have the financial resources to see you through the week.

Trading Position

Invoices issued last week, month to date and year-to-date, together with last year’s year-to-date value and this year’s budget year-to-date
Cost of goods sold last week, month to date and year-to-date, together with last year’s year-to-date value and this year’s budget year-to-date
Gross profit last week, month to date and year-to-date, together with last year’s year-to-date value and this year’s budget year-to-date
Orders received last week, month to date and year-to-date, together with last year’s year-to-date value and this year’s budget year-to-date
Value of unbilled orders or work in progress this week, month to date and year-to-date, together with last year’s year-to-date value and this year’s budget year-to-date

Use these figures to check that you are trading profitably

Month-end Figures

In addition to the above on the first Monday after the month end you should expect to see:

Total debtors
Total creditors
Total value of stock and work in progress

Total overhead costs (all costs apart from cost of goods sold) this month and year-to-date, together with last year’s year-to-date value and this year’s budget year-to-date
Net profit this month and year-to-date, together with last year’s year-to-date value and this year’s budget year-to-date

You need to monitor these figures regularly to make sure you are trading profitably. Ultimately, you do not want to learn from your annual accounts that you were trading at a loss all of the previous year.

Financial management is one of the areas we cover in our TwentyTwenty Insight business review process, where we provide a snapshot of the health of your business with suggestions on what you might do next to grow your business.

If this is of interest, why not speak to Richard Wickes on 020 7371 7001 or email him at Richard.wickes@lgbusinessadvisors.co.uk

HMRC taxing Contractors deemed as Employees (IR35)

IR35 in the Public Sector

How could this affect your business?

Introduction

Who will be affected in the Private Sector?

How will IR35 affect your Business?

When to use the tool

Before you start

Preparing for IR35 in the Private Sector

How can we help?

Financial information you need to run your business effectively

Navigation

IR35 in the Public Sector

How could this affect your business?

Introduction

Who will be affected in the Private Sector?

How will IR35 affect your Business?

When to use the tool

Before you start

Preparing for IR35 in the Private Sector

How can we help?