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HMRC taxing Contractors deemed as Employees (IR35)

By Edward Tudor

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 1st 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.

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