Government has announced a last-minute postponement to the implementation of the Off-Payroll Tax to the private sector in light of the recent Covid-19 outbreak, with the legislation now due to be reintroduced in April 2021.
The decision was taken following significant pressure from contractors and campaigners – and indeed from within the House of Lords – who warned that the inevitable loss of work due to the virus for contractors deemed ‘inside IR35’ and effectively forced into ‘zero rights employment’ would prove catastrophic.
With the introduction of IR35 to the private sector from April 2020, the team at MAD-HR have taken a look at what IR35 is all about and who might be affected by it.
IR35 is legislation under the Finance Act which is designed to combat tax avoidance from individuals who work for you, in the same way as an employee would but who filter their income through a third party – either their own limited company or an umbrella company. Essentially, IR35 will allow HMRC to collect additional payments if a contract is an employee in all but name.
Originally introduced in 2000, the legislation was updated in 2017 for the public sector under the label of ‘Off Payroll Tax Reforms’ and is now being rolled out to the private sector.
According to the draft legislation published by the Government, IR35 will not apply to you if your company meets two or more of the following requirements:
Turnover of no more than £10.2m
Total Balance Sheet of no more than £5.1m
Total employees 50 or less.
A side note to all business owners and managers, HMRC have built some anti-avoidance measures to prevent employers from breaking their business entities down into small subsidiaries which form a group, so you need to be a genuinely small business to be exempt.
So what does IR35 mean for your company if you don’t qualify for the exemption?
The first thing is that you have to look at each situation individually to assess whether or not IR35 applies. It may be the case that it applies to some of your contractors but not all. You will need to audit all contractors who work for you and note how they are paid – directly or through a third party.
Once you have that information you will be able to check individually who falls within IR35 and who doesn’t, by using the ‘Check Employment Status for Tax tool’ on the Gov.UK website. It is up to you to determine whether or not the individual falls under IR35 and if they do, you may have to treat them like an employee for tax purposes and not pay them gross.
The contractor will have the opportunity to challenge your decision, so it’s wise to keep evidence of any checks you carry out so that you can show how you reached your decision.
Business owners and managers will need to work with their HR consultant to ensure at they have taken “reasonable care” to review employees’ tax status’. If you can demonstrate that have determined the status as accurately as possible, there should be no tax risk. If you are unable to demonstrate this, you could risk a tax bill for any contractors or flexible workers who have been incorrectly assessed.
For further advice on IR35, please contact MAD-HR and speak to a senior HR consultant today: