The IR35 tax legislation also referred to as off-payroll working rules, changed on 6 April 2021. Since then, all public authorities, medium and large-sized clients are responsible for deciding the employment status of workers (sometimes known as contractors) and collecting appropriate taxes if IR35 rules apply.
This means that certain businesses that use contractors must assess and determine the employment status of contractors that they work with for tax purposes. If a contractor is found to be working as a ‘disguised employee’, the business will be liable for any unpaid taxes.
As a result, if you use workers that provide their services through their own limited company or another type of intermediary, you need to be aware of the IR35 rules and regulations in the UK, and what this means for your business.
If you use limited company contractors, self-employed people or partnerships to provide the services you need, read on to see if your business is affected by IR35 and what you must do.
What Is IR35?
IR35 is a set of rules that apply to contractors who work through their own limited company or another intermediary, and the companies that use their services. The rules are designed to make sure that contractors who work like employees but operate through a company, a partnership, a personal service company, or as an individual, still pay the same national insurance and income taxes as employees.
Off-payroll working rules for clients, workers (contractors) and their intermediaries are important in preventing tax avoidance by so-called ‘disguised workers’ who would be classed as employees if they were directly engaged by the client.
Do The Rules Apply To Your Business?
If your business meets two or more of the following conditions, the IR35 rules apply to you and you must understand your IR35 responsibilities when working with contractors:
- you have an annual turnover of more than £10.2 million
- you have a balance sheet total of more than £5.1 million (total shown as assets before deducting liabilities)
- you have more than 50 employees
Additionally, you must apply the rules if you have an annual turnover of £10.2 million and are not a company, LLP, unregistered company, or an overseas company.
Fines For Non-Compliance
Following the end of an initial 12-month grace period to allow the changes to bed in, businesses that now fail to comply with the rules could be fined up to £3,000 per contractor, and repeat offenders could face criminal prosecution. Businesses are advised to take steps to ensure they have assessed their workers’ status and that they are fully compliant if IR35 applies.
How Does IR35 Impact My Business?
If you are a public authority, medium or large-sized organisation outside the public sector and you receive the services of a contractor, you are known as the client, engager or hirer. From 6 April 2021, you are responsible for deciding a worker’s employment status and if IR35 rules apply. You can use HMRC’s ‘check employment status’ tool to aid your decision.
Under IR35, a contractor is considered to be an employee of the organisation they are contracted to if they would be considered an employee if they were not working through an intermediary. HMRC states that ‘If the rules apply, you must apply them from the start of the tax year following the end of the calendar year when you met the conditions’
If The Rules Apply
- You need to decide the employment status of all workers operating through their intermediary and communicate your decision using a status determination statement (SDS) which must be given to the person or organisation that your contract is with. The SDS must conclude your decision and the reasons why you reached it.
- Under IR35, you, the client are responsible for ensuring that your contractors are paying the correct amount of tax. If a contractor is found to be working within the scope of an employment contract, you will be responsible for deducting the appropriate amount of income tax and national insurance contributions from their payments and submitting these to HMRC.
- You must keep records of your SDS documents and have processes in place to manage any disagreements that occur due to your decision
Protect Yourself When Working With Contractors
Working with contractors can be a great way to get work done quickly and efficiently without the usual overheads of employees, but there are some things to keep in mind when working with contractors to ensure you don’t fall foul of these important tax regulations.
- You should make sure that the contractor you’re working with is IR35 compliant. This means that they’re operating within the legal limits of their contract and are paying the correct amount of taxes.
- Always make sure that any contract setting out the scope of the contractor relationship includes an IR35 clause. This will protect you in case the contractor is later found to be non-compliant with the law.
- Make sure that you’re clear about what you need from the contractor in terms of what you need them to do and when you need it done. The more specific you can be, the better.
- Have a written contract in place that outlines the scope of work and compensation.
- If you meet the criteria for IR35 in terms of business size and turnover, you should assess your current workforce to confirm the correct employment status is known, then create an SDS document for every new person or organisation you work with.
By following these simple guidelines, you can ensure a smooth and successful experience when working with contractors and ensure that you meet your obligations under IR35.
If your business uses contractors and you meet two or more of the qualifying criteria, you need to be aware of IR35, as the rules can have a significant impact on the way you work with contractors. If you have any questions about IR35 or how to manage working with contractors, please speak to Neathouse Partners for advice.
Our expert team can help you to ensure that you have the tools, knowledge and procedures in place which means you can work with brilliant contractors whilst minimising the risk of fines or non-compliance arising regarding contractors and IR35.