There has been much said in the legal and HR press about ‘IR35’, and more so recently with changes afoot. So, what is it and why is it important?
This strange sounding abbreviation merely refers to the release number of a budget announcement made in 1999 which was aimed at countering tax avoidance where personal services are provided. It relates to individuals who provide services to another business, often through their own company. In other words, they set up a company in which they are the sole director and shareholder and that company offers its services to another business.
The concept itself is simple – the government wants to avoid losing tax where staff are not regular employees – but defining when it applies has never been a clear and easy process.
There is a burden on public organisations to make a determination on whether staff are employees or not. If so, then tax and national insurance contributions would need to be paid, deducted by the person doing the hiring. This could be a real problem because saying that a staff member is not an employee, and not making the relevant deductions, could be costly if HMRC later said that this was wrong. The hirer would have to make all the back payments; not always, at least in practical terms, being able to recover from the staff member concerned and certainly not in full where employers contributions should have applied.
What has changed?
On 6th April 2020 these rules will extend to larger private business who hire external staff. This covers businesses who meet two of the following criteria:
A) They have an annual turnover of more than £10.2 million.
B) They have a balance sheet total of more than £5.1 million;
c) they have more than 50 employees.
If your business fall into this category then it means you now take the responsibility for making a determination on whether each staff member is an employee or not.
What do you need to do?
If you fall within the new categories of business covered by IR35 then you should check the arrangements you have for engaging self-employed staff. If the arrangement is longer term and/or the services are dedicated to your business then it is very likely that you will need to make a determination on the status of that person.
There are several factors which HMRC would take into account when deciding whether external staff are employees, so these are a good starting point for your own determination. These include: