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How should I prepare for IR35?
- AuthorNatalie Rawson
One of the most significant changes that will impact businesses in 2020 will be the expansion of the rules regarding IR35. Employers should be acting now to prepare for this change, or they could face significant financial and reputational consequences from HMRC. Natalie Rawson, Associate Solicitor in our Employment team, explains more here about the change and how we are supporting businesses to prepare now.
What is IR35?
The off-payroll working rules or IR35 became law via the Finance Act in 2000. The Government’s aim was to clamp down on the growing use of ‘one-man-band limited companies’ to provide professional services to clients, where the individual was still working in a manner akin to a traditional ‘employee’, while enjoying the tax benefits afforded them by a corporate structure. IR35 rules do not apply to the genuinely self-employed.
When the coalition Government came in to power in May 2010, George Osborne introduced the creation of the Office of Tax Simplification department who were tasked with identifying new ways of improving IR35.
On Budget Day in 2016, the Government then announced that there would indeed be a clampdown on so-called ‘off-payroll working’ within public sector organisations which came into effect in April 2017. In essence, public sector clients became responsible for determining whether or not their workers were caught by IR35. If they were deemed to be ’employees’ and not ‘contractors’ after all, then the public sector client became responsible for operating IR35 and deducting PAYE and NICs from any caught workers.
The 2017 reform raised an additional £550 million in the first 12 month’s that it was introduced which, we suspect, forms part of the reason why these rules are now being extended. In October 2018, the Chancellor announced an extension of the existing off-payroll working rules to the private sector, which is due to come into force in April 2020.
Who will be affected by the IR35 change in April 2020?
In addition to public sector clients, IR35 will now apply to those medium and large organisations in the private sector, which will include charities. Organisations will be responsible if they engage individuals who work through their own company and two or more of the following conditions are met:
- An annual turnover of more than £10.2 million
- A balance sheet total of more than £5.1 million
- More than 50 employees
If the conditions are met then the organisation becomes responsible for determining the employment status of each individual currently described as a sub-contractor which will aid them in deciding whether IR35 applies.
Those organisations need to provide a report to the individual carrying out the work and/or the company that the organisation contracts with, detailing the outcome and reasons for their determination. If the organisation decides that the ‘sub-contractor’ is in fact a ‘worker’ then the organisation becomes liable for tax and National Insurance contributions.
What to do if the decision is disputed
If the ‘sub-contractor’ disagrees with the decision the organisation will need to:
- Consider the ‘sub-contractor’s’ reasons
- Decide whether to maintain the original decision or not
- Provide reasons to the ‘sub-contractor’ within 45 days
- Keep a record of the decision
This could also lead to individuals bringing a number of claims before an Employment Tribunal, for example unlawful deduction of wages claims for unpaid holiday or sick pay.
For those that don’t meet the criteria, we would still recommend that they consider the employment status of each individual who is currently described as a sub-contractor, for several reasons:
- The Government could decide that these rules should now apply to smaller businesses in the future.
- Sub-contractors’ are becoming very aware of their rights on employment status and if they also work for larger organisations where they have received IR35 reports informing them of their employment status they may expect the same from their smaller clients.
- You may fall outside of the IR35 rules but if your sub-contractors are in fact workers or employees, you could still be facing Employment Tribunal claims.
It is clear that organisations should be preparing now for the implementation of the changes to IR35 in April 2020. Determining employment status is a complex area and will be different on a case by case basis, as proven by the recent claims from individuals of such businesses as Uber, Deliveroo and Pimlico Plumbers. An incorrect classification could lead to serious consequences, which is why we will be hosting a workshop, during which we will explain the definitions involved in IR35, how to determine the status of your workforce and what should be included in the report. To find out more about how we can advise on IR35, you can contact Natalie Rawson on 023 8071 7403 or email firstname.lastname@example.org. Alternatively, you can click here to find out more details about our IR35 workshop taking place on 26th February.
This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice. All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.