As of 6th April 2017, new rules came into force regarding the assessment process made to determine whether a contractor working via a services company for a public sector client has IR35 status. The changes, which were announced in the Chancellor’s Autumn Statement in November last year, see public sector organisations assume responsibility for deciding whether or not limited company contractors should be taxed in the same way as salaried workers or off-payroll staff where this responsibility previously laid with the contractor themselves.
Here we look at some of the controversial aspects of the new legislation and what employers need to consider in relation to the status of those undertaking work on their behalf.
What is IR35?
Introduced with effect from 6 April 2000, the Intermediaries Legislation, more commonly known as IR35, is tax legislation designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would otherwise be deemed an employee.
Why are the changes controversial?
The changes to the rules have been controversial not least because many more contractors are anticipated to fall under IR35, thus being liable to greater levels of taxation. Furthermore, if IR35 status is determined, the contractor will have to pay tax like an employee, but their employment status won’t change. As such, they will not receive the rights and benefits that go with employment such as pension contributions, holiday pay and unfair dismissal rights. The fairness of such an apparent discord has therefore been raised by contractors; of whom some 26,000 expect to be affected by the rules.
The potential for mistakes is also proving of great concern to contractors; especially due to the fact that the determination regarding IR35 status will have to be made before any work has actually been undertaken and there will be no right of appeal.
What action do employers need to take?
The new rules are applicable to all public sector employers / public authorities and any payments made after 5 April 2017, regardless of when the work was completed or when the contract was entered into, come under the new legislation.
Relevant employers will need to conduct an exercise of reviewing their existing contractors and determining their employment status.
When deciding whether a contractor is in fact self-employed or falls under IR35, employers will need to consider factors including whether the individual is required to work specific shift patterns, also looking at whether they are in charge of leading a team or part of one. The right of substitution – the ability of a contractor to send someone else in their place to complete a role – is also a key factor here.
HMRC has recently released a tool to help public sector employers determine the status of contractors. This can be accessed here.
Once conclusions have been drawn on employment status, any applicable changes will need to be worked through; including the setting up of IR35 contractors on payroll and seeing that appropriate written contracts are in place (containing appropriate substitution clauses) for contractors that will continue to be viewed as ‘self-employed’.
For help in relation to the new IR35 legislation or advice on employing the services of contractors generally, please contact either: Pam McColl or Amanda Isherwood or call us on 0161 312 1864. We are situated in Bramhall, Stockport, Cheshire and are happy to give employment advice to Greater Manchester employees and employers.