What does it mean to be outside IR35 for your contractors?
As a business hiring contractors or a recruiter placing them, what does it mean to be outside IR35? What is the potential impact of this on you as the agency or end client? Are there any required actions that you need to take as a result of the contractors you have engaged falling outside IR35.
In order to assist and clarify what it means to engage with contractors who are deemed to fall outside IR35 we will look through these commonly asked questions.
What does it mean to be outside IR35?
To be outside of IR35 following a review it has been determined that the contractors being engaged are working truly independently and are not working in a manner akin to a permanent employee. In practice, to be outside IR35 means that the roles which the contractors have been engaged on are not subject to supervision, direction and control, there are no ongoing obligations to offer or accept works and a there is no requirement for a personal service, (i.e. that a substitute would be acceptable). As such, the contractor can be engaged as an independent contractor via their limited company and would be paid gross for any works completed.
What is the potential impact?
When engaging contractors, to have their assignment fall outside IR35 is the best-case scenario. There is minimal impact as there are no changes in how they are being paid required. Providing there are no changes to the nature of the works being undertaken you can continue to pay gross for any current contractors. This is applicable for future contractors following the upcoming changes in April 2020, provided they fall outside IR35 there will be no change in the way that they are engaged or in the way that your payroll is ran. They will continue to be engaged as an independent contractor and paid gross through their limited company. It is then their responsibility to ensure that the correct taxes and national insurance contributions are paid to the HMRC.
Moving forwards however, following the introduction of IR35 in the Private Sector it the responsibility of the end-hirer and recruitment agency to ensure the correct level of taxes are paid to the HMRC. The onus on and accountability for ensuring that contractors are paying the correct level of tax will be widening from being contractors’ responsibility to the end-hirer and agency.
Are there any required actions to take?
In preparation for these upcoming changes in April 2020 now is the ideal time to act to ensure that everything is in order regarding the IR35 status of your contractors. At present, in the event of a HMRC enquiry, should a contractor be deemed inside IR35 the consequence of this is that they could be required to pay additional taxes. Prior to April 2020 the responsibility of confirming IR35 status is on the contractor, however, moving forward this responsibility will widen to include the agencies and end clients who are engaging them.
It would make good practice to ensure that clear records are kept detailing the IR35 status of any contractors that are engaged by you. These records should include details of the works undertaken and an IR35 review of both the contract and working practices. This will ensure that in the event of an HMRC investigation you are able to demonstrate your awareness of the IR35 status of any contractors that are engaging. Good records will provide you with evidence of your assessment and assist if the HMRC ever come to question the status of any of your contractors.
It can be daunting to be faced with the responsibility of assessing IR35 status of your contractors but there is information and assistance available to help make this process easier. By using your time well leading up to April 2020 you can be proactive in your approach and ensure that you are ahead of the game and that the status of your contractors who are outside IR35 so that you can continue to pay them gross. The good news is that there is a wealth of information out there and specialists such as ourselves who can ease the pressure and help.