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IR35: how will your business be affected?

Off-payroll working rules - known as IR35 - are due to undergo a significant change in April 2020, which will see the responsibility for determining tax status shift from employee to employer. Here's more about the legislation and the options for your business.

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What is IR35?

IR35 is a piece of tax legislation which, at the time of writing, is about to undergo a major change. The rule was introduced in 2000 and means that individuals working for a company as if they were employees - but employed through an intermediary - need to pay similar tax to other employees.

IR35 applies when:

  • An individual personally provides or is obliged to provide services to a 3rd party
  • Services are not direct, but via an intermediary
  • The individual has a Material Interest in that intermediary (they are a generally beneficial owner or have 5% or more interest).

Currently, it is down to the individual to determine whether or not they are affected by IR35, with the exception of those working within the public sector. 

However, after April 2020 the responsibility for assessing employment status will shift to the employer within medium and large organisations.

The government is currently undertaking a review into how to implement the new rules.

You can find out more about IR35 on the Government's website.

Who is exempt from IR35?

Companies classed as "small" under the Companies Act 2006 will be exempt from IR35 for now. This means that the responsibility for determining employment status will rest with their contractors rather than the business employing them.

A business is classed as "small" if, during a 12-month period, it meets two or more of the following criteria:

  • A turnover that is not more than £10.2 million
  • A balance sheet total of not more than 5.1 million
  • It has not more than 50 employees.

What effects could IR35 have on the private sector?

By switching the responsibility from individuals to organisations, the government is making it easier for HMRC to enforce the current legislation.

Employing long-term contractors will become more costly and pose a tax risk to organisations, so many may choose to hire permanent staff or outsource services provided by the original contractor. 

After responsibility for IR35 was switched to public sector organisations - rather than employees - in 2017, the Association of Independent Professionals and the Self-Employed (IPSE) and the CIPD conducted research into its effects on the NHS. They found that:

  • 71% of public sector hiring managers were struggling to hold on to contractors
  • 51% had lost contractors as a direct result of IR35 changes
  • 52% had seen cost rises, delays and project cancellations. 

IR35 options for employers

There are four main options that businesses using contractors can take:

Determine if the individual is outside of IR35

If your company is exempt from IR35 (see above) or it does not apply to the individual concerned, then the company will not be liable. You can check employment status for tax on the Government's website.

Be aware, that an individual may fall back under IR35 - for example, if your company grows beyond the definition of "small". You will need to check regularly to ensure that your business is not liable.

Bring contractors in-house

This option may be worthwhile if you have multiple long-term projects that would justify employing an individual full-time. However, for standalone or part-time projects the cost of paying National Insurance and pension contributions will increase the costs to the business.

Use an umbrella company

Businesses may choose to hire contractors through an umbrella company or move their current contractors to one of these organisations. When a contractor is hired by an umbrella company, the IR35 is that organisation's responsibility - even if they hire them out to another business.

However, umbrella organisations often charge steep rates for the use of contractors, and the individuals themselves generally earn less money for working in this way.

In recent news, IBM have utilised both the in-house and umbrella options to mitigate the risk of liability within their existing contract resource pool. More information can be found here. 

Engage a partner organisation

Working with a partner organisation, such as Coeo, removes the risk of IR35 completely and is especially ideal for shorter-term projects or for bridging a gap whilst you work out your options for IR35.

Coeo offers a range of consulting packages that provide a fixed price, for a fixed project with a fixed outcome. Click the link below to find out more about our offering.

Discover how Coeo can support your business

 

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