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IR35 in the private sector

In a nutshell IR35 is anti-avoidance tax legislation, and it relates to those supplying services to businesses usually through a Limited Company, who from the Inland Revenue’s viewpoint are employees.

Rules changed in the public sector from 2017, such that the employer was responsible for any failures to make deductions.

In private sector IR35 was due to be implemented from April 2020, but due to Pandemic, legislation is now effective as of April 2021.

If a service is provided by contractor through limited company or partnership HMRC will assume that relationship didn’t exist.

If the working relationship is in reality an employment relationship, the service user will be a “deemed employer” and will be liable to pay the tax and National Insurance contributions.

It is therefore important that employers review services provided by a contractor and are comfortable that the working relationship is genuinely one of a self-employed contractor.

If you are a business or organisation meeting two of the following criteria, liability now shifts to you to assess the situation:

  • Annual turnover of £10.2 million.
  • Balance sheet of over £5.1 million.
  • Over 50 employees.

If you do meet 2 out of the 3 criteria you will need to provide a determination in the form of a Status Determination Statement.

Deemed employees are required to be assessed within 45 days. In the meantime, and if failing to do so, deemed employers will have ongoing responsibility for tax and National Insurance contributions which are payable.

HMRC has an online tool called CEST which enables employers to undertake the Status Determination Statement. However, quite often Employers are left none the wiser as the result can be inconclusive. Employers can also assess a particular situation and where liability might arise by considering various factors including:

  • What was/is the Intention of the parties?
  • What does any contact state?
  • What is the level of control exercised by the employer business over the contractor? This could include how the method of work is carried out, whether the employer business determines the number of hours the contractor works and the level of supervision they exert over the contract.
  • Is the contractor required to comply with company policies and procedures?
  • Is mutuality of obligation?
  • Is the contractor able to providing a substitute to perform the services?
  • Does the contractor provide their own Insurance or are they insured under the employer business insurance?
  • Does the contractor supply their own equipment and tools?
  • Does the contractor supply services to multiple businesses or work exclusively for just your business?
  • What is the level of integration of the contractor into the employers business?

What is clear is that no one test takes precedence over another, and often a combination of factors could mean that what was once considered to be a contractor relationship is one that HMRC considers to be an employer/employee relationship.

Employers in the private sector who are ‘caught’ by IR35 should take steps to ensure they comply with the legislation. Practical steps should be taken, and employers should undertake a full audit and review of any contractor services used. Identify contractors who work in this way and decide if they are inside or outside the rules. Don’t just rely on what the paperwork says, look at the reality of the situation. Inform contractors of their status determination, and any agencies you engage with, and be ready to add the contractor to the payroll if needed. Above all, maintain a robust audit trail and test your processes, systems and controls.

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