IR35 is coming
Changes to IR35 legislation applying to the private sector will take effect from April 2020
What can you do now to plan?
IR35 is reforming for the private sector, affected businesses are now preparing
for legislation change – are you ready? Over the last few years, the Government
has continued to focus their efforts to tackle what they perceive as ‘tax
avoidance’ within the practice of engaging contractors who operate via their own
And while no one would argue against the need for compliant engagements, the
by-products of the latest potential reforms are increased responsibilities for
clients who engage workers using this operating model.
IR35 – What is it?
The IR35 legislation was introduced in 2000 to tackle concerns about businesses
hiring individuals as consultants through Limited companies, rather than
employees, and the resulting unpaid taxes (often referred to as ‘disguised
Any individual ‘inside IR35’ (so deemed to be operating like an employee, rather
than a consultant) must pay tax and NICs, usually by using an umbrella service
or operating a PAYE payroll within a personal service company (PSC).
If workers are providing a genuinely business-to-business service, they are able
to operate ‘outside’ of IR35 and therefore PAYE tax will not be due on their
From April 2020 it will be the client rather than the consultant who will be
responsible for assessing if IR35 applies and for ensuring the proper tax is paid
where it does.
How IR35 is enforced
HMRC are responsible for enforcing the IR35 rules and do so via employment
status investigations and decisions. Taxpayers can challenge these decisions
through the Tax Tribunal.
While HMRC has not chosen to pursue many IR35 investigations with individual
Limited Companies over the past few years, there have been a couple of high-profile examples which have recently received a lot of media attention, including
BBC television presenters
The HMRC has said that it cannot effectively enforce IR35 where responsibility
for assessment of status and payment of the relevant tax lies with the individual
contractor. It has already transferred this liability to the client in the Public
Sector and this will be extended to medium and large private companies from
April 2020. The exact rules are currently being finalised following a consultation
and are expected to be published this suffer.
If an assignment is inside of IR35 and the entity responsible for paying the
worker (either the hirer or the agency involved) does not deduct NI and
applicable tax before paying the worker, then that body can be liable for the
unpaid tax and NIC payments. It is, therefore, vital that all parties in the supply
chain understand the risks and take steps to comply with the new taxation
How IR35 applies to your business
While the change will be challenging, there is also an opportunity to increase
compliance and still allow businesses to benefit from the hugely skilled and
talented flexible contractor population within the UK.
Companies should take the opportunity between now and then to assess the
current nature of their contractor relationships and, if necessary, take steps to
ensure they are genuine business to business relationships which would fall
outside of IR35. This would include reviewing all contractual documentation.
What makes an assignment ‘inside’ or ‘outside’ IR35?
- Control and Supervision
- Working arrangements
- Mutuality of obligation
- Financial risk and opportunity to profit
Can you guess which is inside and which is outside IR35?
“I want to redecorate a room, and I need to hire a contractor to do so. When I
hire this worker, I specify that I want the room to be painted blue and agree an
hourly rate with them. I tell the worker that I want them to start the job by
painting the top right-hand corner first and to continue painting in a clockwise
direction. I also say I want all the skirting boards and window frames to be
protected with masking tape. I tell the worker that I will be back to check on the
progress every day. I provide the paint, the brushes, ladders and all the other
tools needed for the job and also tell them to complete some additional work
which wasn’t agreed to begin with. If the worker isn’t available for some reason,
they are not allowed to send a substitute decorator in their place.”
“I needed to paint a room, and so I hired a contractor to do so. When I hired this
worker, I specified that I wanted to paint the room red and that there was a
deadline for the job to be completed; we agreed a price for the job. The worker
provided all their own equipment, used their skills and experience to determine
how to approach and execute the project. If they were not available, they could
send a suitably qualified and experienced substitute to fulfil the contract on their
behalf. When I asked for them to complete some additional work, we agreed a
separate fee for this to be completed.”
In the above scenario, there is a good chance that Contractor 1 would be inside
of IR35 – they are subject to supervision and control and do not have their own
equipment. Also, by being paid an hourly rate there is no financial risk.
We can help
Managing subcontractors can be a headache for many organisations. However,
they are viewed as a flexible source of expertise and labour, available as and
when your business requires. That flexibility comes at a price: less control. It is,
therefore, vital that you have in place effective processes for assessing the
competence of your subcontractors, backed up with robust formal agreements.
You should also have a process to pre-qualify your subcontractors so you can
demonstrate they are competent and qualified to be carrying out work on site.
This can also mitigate any issues related to accidents, standard of work and
deductions from invoices. Here at EL Direct Ltd we have a solution for this called
our First For Contractors Package; this is popular throughout industry to
manage subcontractors, consultants and suppliers.
The key features of the First for Contractors package are:
- Easily generate and edit custom pre-qualification questionnaires
- Your contractors can login on any device and manage their own information
- Telephone support from our in-house legal team
- Monitor expiry dates by receiving alerts when evidence needs renewing
- Protect your business from HMRC and employment tribunals
- Create a formal agreement with each contractor
- Produce, with one click, a PDF report of a contractor’s approval
We can offer a free online demonstration off the First for Contractors pack.
Please give us a call on 0114 241 7092 or email firstname.lastname@example.org.