IR35: Problems on the horizon for self-employed contractors
HMRC’s desire to catch those working on a self-employed basis engaged by medium-large businesses, whom it considers to effectively be in ‘disguised employment’, is shortly to be put into legislation.
[For a background on IR35 and who it may affect, click https://burlingtonslegal.com/news/what-is-ir35-and-who-does-it-affect/ to read our article from the April edition of our newsletter.]
Those who provide services personally, but through an intermediary (e.g. a personal services company) and who are engaged in the private sector (which includes charities), but who would otherwise be categorised as an employee were it not for the presence of the intermediary, are affected by the current IR35 Rules. But those individuals are not at present responsible for determining their own employment status, as that responsibility currently rests with the intermediary. This in turn affects the tax status.
For individuals who are engaged through an intermediary in the public sector, it is already the responsibility of that public sector client to determine the individual’s employment status.
From 6 April 2020, the new Rules will apply to any private sector organisation that fulfils at least two of the following criteria:
Has an annual turnover of more than £10.2m
Has a balance sheet total of more than £5.1m
Has more than 50 employees
Subsidiary companies are also caught by the Rules if their parent company is caught.
There is a simplified test that applies to some organisations. This must be applied if annual turnover exceeds £10.2m and the organisation is not a company, an LLP, an unregistered company or an overseas company.
If the new Rules apply and it is determined that an individual would otherwise be an employee of the client organisation, then the organisation is responsible for tax and NI contributions.
Organisations to whom the Rules will apply must consider each worker’s situation ‘with reasonable care’, must communicate their determination with reasons to the worker and the intermediary, keep a record of the determination, and adopt a means of resolving a disagreement on the individual’s status. If the determination is challenged, they must (re)consider and give a decision with reasons within 45 days (and again keep a record).
If organisations do not abide by these requirements, they will by default become responsible for the individual’s tax and NI contributions.
Effect on individuals and businesses
Although small businesses, and those individuals engaged by them through intermediaries will not be affected, many self-employed individuals who are currently engaged in this fashion by larger clients, such as large retailers and banks, are seeing huge reductions in their work, as such clients are tending to err on the side of caution.
This may also have an adverse effect on those clients too, as they may prefer a more ad hoc arrangement, whereby they engage individuals for periods which are initially unknown and which may vary in intensity. The usual employment status tests involving consideration of personal service, mutuality of obligations and degree of control (to paraphrase the main elements), and can be difficult to apply, particularly where individuals in this situation may work for more than one client but not at the same time.
The problem is likely to arise because clients simply do not want to take on a risk but they also do not want to employ individuals in these roles because of the associated duties that go with that.