IR35: Is my business safe from HMRC? (Part 1)

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Ben Mendelson

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All Hands On Deck

Spring is on its way and your business is growing, happy days! There’s more work coming in than your team can currently handle. What about bringing on a consultant? Problem solved!

At least it is until you get slapped with a big old fine by HMRC who’ve decided that the “consultants” working for your business are in fact “disguised employees” in respect of whom you’ve dodged paying a whole bunch of tax. What’s worse is the onus was on you to determine the employment status of these “consultants”.

Let us help you avoid this financial heartbreak by better understanding the imminent change to the rules surrounding IR35 and the meaning of “off-payroll working”. 

The Boring Part (i.e. the Law)

The terms “IR35” and “off-payroll working” are often used interchangeably as they both relate to the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). This is the legislation which regulates how HMRC treats persons who provide services to a client through an intermediary such as a limited company, partnership or personal service company and who, otherwise, would be classed as an employee (had they be contracted directly by the client). For the sake of clarity, we will refer to “IR35” and “off-payroll working” collectively as “IR35”.

It’s easy to see both sides of the argument here. A contractor will enjoy far greater tax efficiency for their business by operating through an intermediary like a limited company. On the other hand, why should these “disguised employees” pay less tax than their fellow workers by virtue of the latter simply being “traditionally-employed”? Are HMRC in fact a modern-day version of Robin Hood? Well, not quite, but these new developments to the IR35 rules are designed to ensure that contractors pay broadly the same tax and NI contributions as an employee. 

Developments: For Better or for Worse

So what are these new developments? After all, IR35 itself is not new, having been applied in the public sector as early as 2017. Two big things have changed though. Firstly, from 6 April 2021, IR35 will be applied to the private sector too. This assumes no further delays due to Covid-19 (bear in mind the original schedule date was April 2020). Secondly, as of 6 April 2021, it will no longer be a contractor’s responsibility to determine whether they classify as a “disguised employee”, it will now become your businesses’ responsibility. As if you didn’t already have enough to worry about! 

That’s not to say that contractors aren’t sweating under the collar too. They still hold some responsibility. Erroneously declaring to HMRC that IR35 does not apply when in fact it does, will result in both your business and the contractor coughing up unpaid tax from up to six years prior to an HMRC investigation taking place. 

All businesses are created equally.. or are they?

Admittedly, the extension of IR35 into the private sector looks to be one of those things that most businesses will just have to embrace. Add it to the list of obligations and move on. Yes, most businesses could really do without the additional administrative burdens brought about by IR35’s latest mutation, but they will do what needs to be done to cooperate in a properly-regulated society. In any event, the majority of them (often larger in size) will likely already have opted for an employment arrangement with their workers, with perhaps a scattering of contractors thrown in for more specific tasks. 

But what about smaller businesses? Those still in their infancy, or growing quickly with a need for additional ‘hands on deck’ as soon as possible? These companies often don’t have a roster of employees, rather relying on the comings and goings of contractors to perform an array of services. What’s more, a “grin and bear it” attitude towards a host of additional administrative burdens is not quite as simple for smaller businesses as it is for larger ones. 

HMRC to the rescue! To avoid a situation where thousands of small businesses are bogged down by the encumbrances of IR35, the government have introduced an exemption for small organisations. That is not to say that IR35 will not apply to them. It will. But what does change, is that the burden of proof to determine whether IR35 applies will not pass to the small business from the contractor, thereby avoiding the additional obligations that come with that shift. Sorry medium and large organisations, but hurrah for the small. 

So are you big, medium or small.. find out in our next blog. 

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