IR35: Is my business safe from HMRC? (Part 2)

Written by: 

Ben Mendelson

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Picking up from where we left off..

Just when you thought you couldn’t bear to hear another reference to IR35, here we are again with a second instalment of our blog on IR35 and “off-payroll working”.  

But now is crunch time. The (already once delayed) April 2021 deadline has passed and if your business hasn’t acted already, now is the time to carefully consider your position.

In our last blog “IR35: Is my business safe from HMRC? (Part 1)” (https://www.chronoslaw.co.uk/ir35-is-my-business-safe-from-hmrc-part-1/), we gave you a crash-course on IR35 and “off-payroll working”, we explored the upcoming developments of these laws to the private sector and we considered the imminent consequences of them for your business. 

We also introduced to you the glimmer of hope in the form of the small organisations exemption, designed by HMRC to prevent thousands of small businesses being unnecessarily bogged down by the encumbrances of IR35. Although IR35 will still apply to these small organisations, the shifting burden of proof to determine whether or not IR35 applies and a “deemed employment” exists, will not pass to the small business from the contractor, thereby avoiding the additional obligations that come with that shift.

Size does matter.

So the big question is, how do I know whether my business classifies as a small organisation for the purposes of the exemption? Well, this is determined according to a 3-armed test, where meeting 2 out of 3 arms is the threshold. 

Drum roll.. Your business will be eligible for the small organisation exemption if:

  1. Turnover Test: Your annual turnover is less than £10.2 million;
  2. Balance Sheet Test: Your balance sheet total reflects less than £5.1 million; and/or
  3. Employee Number Test: You have less than 50 employees.

Deep joy, you’ve qualified for the small organisation exemption by the skin of your teeth. But a word of warning to small businesses – as exciting as it may be to be acquired down the line by a bigger organisation (unless it’s a hostile takeover, in which case you have our number), this may have an effect on your exemption. This is because connections between organisations who are members of a group, will be taken into consideration when performing the 3-armed test. So be aware that just because you’ve met the exemption once, does not mean that you cannot fail to meet the exemption in the future should your businesses’ circumstances change.

I’m a sole trader. Where do we come in?

What about sole traders you may ask? Where do these captains of industry fall in? Are they affected by IR35 and the developments in respect thereof? The simple answer is no, as a sole trader is personally liable for their business debts and so there will not be an intermediary through which the sole trader will contract, only themselves. That is not to say that employment-related issues cannot arise between organisations and sole traders. Fortunately, IR35 does not muddy the water further when it comes to running your one person enterprise. 

What about contractor’s working outside of the UK?

And what if you have contractors operating from outside of the UK? Well, for IR35 to apply, the contractor in question would need to be a UK taxpayer, as the basis for IR35 hinges on the desire to prevent “disguised employees” from dodging the same tax and NI contributions as an employee would be liable for. There are obviously nuances to these situations, but this general rule applies and should be considered when contracting with consultants outside the UK. 

How can I plan ahead?

A good place to start is to ensure that all of your businesses’ contracts are drafted (legitimately and genuinely) to reduce the risk of IR35 applying. It goes without saying that the contractual arrangements you enter into must reflect the actual working relationship between contractors and yourselves, which will be subject to change over time. 

At Chronos Law, we have helped guide a number of our clients through these knotty issues caused by IR35. We review your contracts to determine where you stand in all this. We can advise businesses of any size as to their unique risks associated with developments to IR35. 

We look for factors that might determine whether or not your relationships with contractors might be caught by IR35. We assess mutuality of obligations. As a business, are you obliged to offer a contractor work and are they obliged to accept it? If yes, this will likely trigger IR35, if no, it is more likely not to. We look at whether your contractors are substitutable with others? If not, this smells suspiciously like a “disguised employee”.. Similarly, can the contractor take on additional clients other than your business? If not, beware IR35. Finally, we consider to what extent supervision, direction or control applies. The greater these instances are, the more likely that IR35 will apply.

If it hasn’t become painfully obvious already, time is not on your side here. Starting now will be less a case of planning ahead and far more a case of playing catch-up. However, all is not lost and there are resources to help you ensure compliance. Let us help to place you and your business in the most beneficial position possible to meet these new challenges head on.

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