With IR35 rules set to change in April 2020, what will businesses need to do if they have contractors engaged by them, who are providing their services through their own company?
From this date, for all but the smaller companies, it is up to the organisation or business to whom the contractor is providing their services – that is by whom they are actually engaged – to decide whether the individual should be considered a deemed employee and therefore subject to the IR35 rules.
This decision must be communicated to the contractor before any work is undertaken and via a Status Determination Statement (“SDS”) setting out the reasons why IR35 is, or is not, thought to apply. There is no prescribed format for this Statement, but invariably it will have to be made in writing.
As evidenced by HMRC’s failings in losing nine of the twelve reported IR35 cases taking to tribunal since 2011, it can be complicated to make an IR35 Status Determination.
HMRC has an online tool that it promotes for this purpose, the Check Employment Status Tool (“CEST”), which in theory should provide a reasoned conclusion on IR35. At times this can be helpful because it is a requirement of the draft legislation that reasonable care must be taken when making the Determination or else penalties will be imposed.
However, the CEST often outputs an “unable to determine” conclusion which is not helpful as you can’t sit on the fence, nor can you make a blanket determination to cover all contractors, which is what some public sector organisations initially did. In addition, it is evident that the CEST evaluation often inappropriately leans towards IR35 applying.
Unless and until a business has provided their contractor with an SDS, businesses/organisations will remain responsible for collecting any tax or national insurance, and for paying it across to HMRC.
If a business determines that a contractor should be deemed an employee of the business, for tax purposes they must treat them as such and deduct PAYE taxes from their invoices and remit the taxes to HMRC.
If a business is using the services of a contractor via an agency, they remain responsible for determining the contractor’s IR35 status and issuing an SDS, but in these circumstances they can pass the SDS to the agency who then become liable for collection and payment of any IR35 tax and national insurance.
If a business issues an SDS to a contractor or to the agency, if they are agency-supplied, the SDS can be challenged and there is a 45-day window available for the contractor or the agency to do this. During that period, the business must either confirm with reasons why the SDS can be upheld or withdraw it and provide a revised decision. If the business fails to meet this target, liability for compliance with IR35 and collection and payment of taxes falls back to the business.
Complying with IR35 is going to be difficult. Ignoring the legislation is no longer an option. If a business is too lenient in its decision making, it could face retrospective IR35 tax liabilities being imposed by HMRC and penalties for being careless.
If too harsh or overly cautious, businesses will bring in potentially unnecessary employer national insurance liabilities and may face problems engaging with contractors in the future. Businesses may also find they have contractors demanding full employment rights such as holiday pay, pension contributions and the like on the basis they may feel entitled to employee benefits if they are being taxed as such.
Preparation is key to ensure an accurate SDS assessment is made, passed to the correct parties at the correct time and that challenges are dealt with and communicated properly.
What should businesses be doing now?
- Firstly, they need to determine whether the business is considered to be small and therefore able to pass responsibility for IR35 compliance to its contractors.
- They then need to identify potentially impacted workers and make an assessment to determine which would be deemed to be employees under the IR35 status tests.
- In addition, businesses need to calculate any likely cost increases due to employer’s national insurance and Apprenticeship Levy charges arising under IR35, and any potential changes in contractors’ rates.
- They also need to ensure each area within their business understands their responsibilities and takes ownership, accordingly, training them where necessary and especially when it comes to determining IR35 employment status.
- Finally, they need to communicate with contractors now to ensure they are aware of the changes, of the decisions that need to be made and as to how this will affect their income.
With businesses potentially being left with responsibility for determining whether this legislation applies to its contractors, as well as potentially having to take on responsibility for collecting additional tax and national insurance, there is a lot for companies to consider in the next six months.