A basic IR35 guide for your Organisation

What is IR35?

IR35 is a complicated piece of legislation designed to close a loophole in the tax system meaning workers could use a limited company structure in order to pay less tax.

In these cases, despite operating under a limited company contract, the working reality is more like an employer-employee relationship, and thus the worker should be taxed as an employee.

How does it affect you?

If assessed as inside IR35, you will need to pay the same income tax and NICs as if you were employed. However, you still won’t get any employment benefits, like paid holiday or sick leave.

Inside or Outside?

End clients must provide a ‘status determination statement’, which says whether or not you believe IR35 applies to both the contractor and the party directly engaging the workers – which will often be the recruitment agency – and crucially, the reasoning behind it.

Outside IR35

Where contractors are assessed as outside IR35, nothing much changes. You’ll still pay them gross, via their PSC, and they will account for their earnings as they do now.

The only real difference will be that the hirer may be called on to defend the outside decision.

Inside IR35

Where the end client deems an engagement as inside IR35, they can expect the contractor to request a higher day rate to compensate for the increased tax burden they will face.

This would likely increase your wage bill. You could of course hold your ground and continue to offer the same rates of pay, however you run the risk of losing your best talent who may seek ‘Outside’ roles.

What if you get it wrong?

Potentially the fee payer may be liable for the tax and National Insurance not deducted under the inside IR35 rules. The fee payer could be you as the end client, or it could be the agency that recruited the contractor.

Incorrectly determined as ‘outside’ when they should be ‘inside’ could lead to the fee payer being liable to pay charges amounting to 1.5x of the total amount paid to each contractor. Note that this could be backdated to cover the full length of the assignment from 6 April 2020, up to a maximum of four years.

So for example, in 2024, the fee payer could be liable to pay HMRC an additional 50% of the total contingent worker costs for the past four years, plus any fines and interest on overdue payments.

Partners

Are there any exceptions?

Yes, businesses classed as “small” for the tax year will be exempt from the new rules. “Small” is two or more of the following requirements (as per the Companies Act 2006):

  • aggregate net turnover less than £10.2 million
  • aggregate balance sheet total less than £6.1 million
  • less than 50 employees.

When is IR35 being introduced?

As it stands at the moment, the government are planning to introduce IR to the private sector in April 2020. (Budget 2018)

What should you do now?

Start by seeking IR35 specialist advice. There are plenty of providers offering their services.

Keep up to speed on developments with IR35 legislation. There may be an election before April 2020.

Start your internal preparation by assessing your current contingent workforce. e.g. How many contingent workers you have engaged ? Who are they? What are their roles? What are the details of each engagement on a case-by-case basis?