We are very grateful to our friends at Thackray Williams Solicitors who have provided some guidelines and insight into what the legislation includes. We hope this is useful.
The IR35 legislation was first introduced to tackle a form of tax avoidance whereby individuals may seek to avoid paying employee income tax and national insurance contributions by supplying their services through an intermediary (usually a personal service company) and paying themselves in dividends.
The Social Security Contributions (Intermediaries) Regulations 2000 (the Regulations) and Chapter 8 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) set out various conditions that, if met, will mean that IR35 applies. The questions set out in the Regulations and ITEPA that need to be addressed in order to determine whether an arrangement will be caught by the IR35 legislation are mainly straightforward, however, determining a worker’s employment status is less straightforward and in both the Regulations and ITEPA, one of the key questions is whether the worker would (for tax or NICs purposes) have been an employee of the client if they had been working directly for it.
The IR35 legislation, pre-April 2020, requires the intermediary to determine whether the worker would have been deemed an employee of the end-user client, but for the existence of the intermediary. i.e. if the worker contracted directly with the client company, would there be an employer/employee relationship and, therefore, the worker subject to employee income tax and national insurance? If so, the intermediary must operate payroll, make deductions for income tax and employee national insurance contributions and pay employer’s national insurance contributions on the fees received for the services.
In July 2019, the government published draft legislation that, with effect from April 2020, medium and large companies in the private sector that contract with personal service companies will have to account for tax and national insurance through PAYE. The effect of the new rules is that, consequently, IR35 will no longer apply and the off-payroll working rules will apply instead.
The off-payroll working rules mean that the burden of making a determination of employment status falls on medium and large “end-user clients” who then need to notify their contracting party and the worker of that status determination. In other words, from April 2020 the burden of determining the status of the contractor falls on the company as opposed to the intermediary. If the off-payroll working rules apply, then the fee-payer is responsible for deducting tax and national insurance and paying it to HMRC.
It is worth noting that, where an end user client qualifies as “small” they will be exempt from the off-payroll working rules but the original IR35 legislation will continue to apply. Small companies are defined in the Companies Act 2006, as a company having two or more of:
When determining the deemed employment status of the worker, the same factors should still be considered, regardless of who is responsible for operating payroll deductions.
From 6 April 2020, end user clients will need to determine the employment status of a worker. Once the determination is made, the end user client will need to pass the determination, and the reasons for it, to the worker and the person or organisation that they contract with. Detailed records of status determinations should be kept, and processes should be in place to deal with any disagreements that arise from the status determination. The end user client must take care when determining a worker’s employment status as failure to do so will result in the worker’s tax and national insurance contributions becoming the responsibility of the end user client.
In the event that a worker, or the agency paying the worker’s intermediary, disagrees with the determination reached, the end user client will need to consider the reasons given for the disagreement, decide whether to maintain the determination or provide a new one and keep a record of the representations made and reasons given. The end user client must provide their response to the disagreement within 45 days of receiving the same and during this time should continue to apply the rules in line with the original determination. Failure to respond within 45 days will result in the worker’s tax and national insurance contributions being the end user client’s responsibility.
In determining an individual’s employment status, there are many factors that companies engaging contractors will need to look at and HMRC provides guidance, including, but not limited to, the following factors:
HMRC has made available an online tool (CEST) to determine whether, if the contract were directly between the worker and end client, the engagement would have the nature of employment.
Whilst it is important that contracts are drafted in such a way as to reduce the risk of IR35/the off-payroll working rules applying, it is also important that the practical reality is in accordance with the terms. In order to limit the risk, the following should be considered:
It is important to note that HMRC guidance is not definitive and case law has determined that each case depends on its own facts and therefore the outcome in any individual case is impossible to predict.
If you have any queries regarding employment status, do not hesitate to contact one of the employment law specialists at Thackray Williams.