Does IR35 apply to my business?
There are so many unanswered questions going on in the UK at the moment and so many of them revolve around peoples’ work and livelihoods. The current pandemic is creating lots of uncertainty for so many and for so many reasons and given this, Brookson Legal would like to provide some clarity on an area of law that has also been impacted by the pandemic…….and that is by answering the question, does IR35 apply to my business?
Broadly speaking, IR35, also known as the off-payroll working rules, is aimed at contractors who choose to provide their services through an intermediary (typically their own personal service company or any company from which they have the right to receive a payment) to a client organisation, either directly or via an agency. Its well-known aim is to ensure that genuine contractors pay the right level of tax on their earnings commensurate to their working practices. Therefore, where a contractor is working for a client as a disguised employee, he has PAYE deducted at source from his income, similarly to an employee.
Who the rules apply to?
Firstly, it is important to note that the rules do not apply to contractors employed by an umbrella company or those who choose to operate as a sole trader. Therefore, and typically, the rules apply to contractors who provide services through an intermediary company, a hiring client who receives such services and an agency (also referred to as the fee-payer) that provides a contractor’s services to a hiring client.
Understanding the labour supply chains in which your business operates is crucial. Each business in a supply chain should fully understand its responsibilities, how it needs to discharge those responsibilities and the consequences of failing to do so. Compliance with the rules, fulfilling obligations and effective and clear communication throughout a supply chain will mean that any tax risks are mitigated as much as possible.
The well-documented changes ahead mean that from April 2021, all public authorities and medium and large-sized clients will be responsible for determining the employment status of the contractors that they engage. The same rules will apply to subsidiaries of parent companies that are medium or large in size. The fact that the rules will apply to ‘medium’ and ‘large-sized’ clients from April 2021 means that there are exemptions for those businesses that are not classed as such and are instead categorised as a ‘small’ business.
What are the ‘Small Business Tests’?
Small businesses will not bear the burden of determining the employment status of the contractors that they engage and the responsibility for doing so will remain with the individual contractors themselves. But this poses the important question of what equates to a ‘small’ business?
The small business tests that will apply in conjunction with the forthcoming changes to IR35 are in line with the ‘Small Companies Regime’. This means that the changes to the rules will not apply to those businesses that do not meet two out of three of the following:
- Have an annual turnover of more than £10.2 million;
- Have a balance sheet total of more than £5.1 million;
- Have more than 50 employees.
So, if a business does not exceed two out of three of the above criteria, it will be considered a small business and consequently, the responsibility for determining the employment status of any contractors that it engages will remain with the contractors themselves. It will also be down to the individual contractors to ensure that the correct levels of tax are applied to and paid on their earnings.
Notwithstanding this status quo for small businesses, it will be crucial for a small business to know and fully understand the determining criteria when establishing its size, as it may be asked for such confirmation from agencies and contractors when they are considering IR35 themselves. A small business should also keep its status as such under review in the event that its circumstances change meaning that it would no longer be categorised as such.
Delays to the changes
The changes to the rules were originally scheduled to come into effect on 6 April 2020. The changes were delayed until April 2021, to allow individuals and businesses alike to ride the economic challenges that the coronavirus pandemic has created. It is, however, crucial for all types of entities to not lose sight of the delayed changes, as it is well documented that the changes were simply delayed and not cancelled. HMRC have stated that organisations should continue to prepare for the reforms and that it is actively working with stakeholders, industries and contractors to help them to prepare for the reform.
With this in mind, individuals and businesses alike need to be armed and ready for April 2021. Businesses should have clear sight and a solid understanding of their contingent workforce and how they are engaged. A concrete understanding on if and how IR35 and the forthcoming changes will affect a business, each party’s role and responsibilities in a supply chain, along with having sound processes in place, are going to be fundamental in ensuring that a business meets its obligations under the rules; not doing so could prove very costly.
The clock is ticking… April 2021 is fast approaching!
How can Brookson Legal help?
No matter if you are a Hirer, Recruiter or Contractor Brookson Legal are on had to advice when it comes to IR35. Contact us now to find out how we can help you.