Dont brush aside IR35; learn the art of compliance

In April 2020, the IR35 legislation will apply to all medium and large private sector businesses which engage individuals through Personal Service Companies (PSCs).  This means that these types of businesses will be responsible for determining if the individual should be considered as an employee for tax purposes (unlike the position under the previous rules).  As a result, medium and large private sector businesses that are members of the Painters and Decorators Association should assess the applicability of the IR35 legislation to the extent they engage with PSCs.

What is IR35?

The IR35 legislation was originally introduced to address a form of perceived tax avoidance where individuals would avoid paying income tax and national insurance contributions (NICs) by delivering their services through an intermediary, often a PSC.  The public sector has been subject to the IR35 legislation since April 2017.  From 6 April 2020, the private sector will also be required to follow these rules.

What is a PSC?

In simple terms, a PSC is a limited company which usually has one director, who is pretty much the contractor himself who provides the services.  For example (fictional), Bob is the director of Bob Décor Limited, and it is Bob himself who delivers the decorating services to commercial or domestic clients.  Broadly speaking, the rules will apply if the individual, e.g. Bob, would have been considered an employee of the business had Bob not been engaged through Bob Décor Limited.

Previously, the PSC would determine the responsibility for payment of income tax and NICs, i.e. whether the business or the PSC pays.  However, the forthcoming changes will place this responsibility on the business.

Who will be affected?

If you run a medium or large business in the private sector and heavily rely on PSCs for the delivery of any kind of service, such as painting, decorating or furnishing, you will be affected.

The HMRC apply a number of tests to determine whether a contractor or employee arrangement exists, i.e. whether Bob is actually operating as a contractor or an employee.  Whilst HMRC and the Courts will consider the terms of the contract agreed between the business and PSC, they will pay more attention to the actual arrangements, taking various factors into consideration such as:

  • how much control the business asserts over the individual (PSC);

  • whether the individual has a right to provide a substitute;

  • whether the individual is under an obligation to accept work;

  • the degree of the individual’s integration into the business; and

  • whether the individual uses his own equipment, or the business’.

Currently, the exemption test is being finalised.  However, you be exempt if your business satisfies two or more of the criteria below:

  • Annual turnover of £10.2 million or less;

  • Balance Sheet total of £5.1 million or less; and / or

  • Number of employees being 50 of less.

What is the effect of IR35?

If the IR35 legislation applies to your business, you will be responsible for determining the individual’s employment status, i.e. does Bob operate as a contractor or your employee?  You will need to communicate this to the individual, and the individual may request reasons or a review of your decision.  Inevitably, if the individual is found to be an employee, you will be responsible for paying income tax and NICs to HMRC on behalf of the PSC.

What can I do to prepare?

The HMRC has issued a warning to businesses not to delay its preparations for the IR35 legislation.  Businesses who are likely to be affected should take active steps to prepare.  Key considerations should include:

  • reviewing your current arrangements with PSCs;

  • assessing whether the IR35 legislation applies to you;

  • determining whether you or the PSC is responsible for paying income tax and NICs;

  • deciding on an approach if you are responsible for paying income tax and NICs, e.g. whether your business will absorb this cost or you will re-negotiate fees with the PSC;

  • implementing a rigid IR35 assessment process when on-boarding new PSCs;

  • ensuring the approach of all business departments align, e.g. from a procurement, HR and tax perspective; and

  • ensuring your contracts with PSCs are drafted to meet the IR35 requirements.

Author

Gurdeep Plahe, a Paralegal in the Outsourcing, Technology and Commercial team at Wright Hassall LLP.