IR35: a guide for employers using self employed workers

In an article first published by Growth Business, Pam Loch provides guidance for employers using self employed workers, and the implications of IR35 tax rules.  

IR35: where are we now?

It was widely anticipated that the 2019 Spring Statement would include some clarity on the proposed extension to IR35 tax rules.  However, in a statement heavily clouded by Brexit and the wider state of the economy, this didn’t happen.  Instead confusion remains in the private sector as to what will happen, and whether self-employed status is going to lose its attraction.  This is a quick guide for employers who engage with self-employed consultants or contractors and are looking to prepare for the changes.

Recap of how IR35 works

IR35 applies where individuals seek to avoid paying employee income tax and National Insurance Contributions (NICs) by supplying their services through their own limited company, a Personal Services Company (PSC).  Here’s an example of how it can apply:

  • A Mr Smith sets up a company and works for his company Mr Smith Limited.
  • Mr Smith Limited enters into a contract with ABC Ltd to provide services under an agreement that Mr Smith will carry out the actual work.
  • Realistically there is never any intention for anyone other than Mr Smith to perform the services via Mr Smith Limited and Mr Smith acts, and is treated, in a very similar way to ABC Limited’s employees.

It’s likely that IR35 will be applied here so HMRC will regard ABC Limited as the employer of Mr Smith and they will be liable for making the appropriate deductions for tax and NICs prior to making payments to Mr Smith Limited. HMRC may apply IR35 if it considers that the purpose of the PSC was to avoid being deemed an employee/worker and avoid payment of employment tax and NICs. 

HMRC will form a view as to whether or not the individual would be an employee or an office holder if there was no intermediary.  In making the assessment on status, HMRC will look at the reality of the arrangement, it will ‘not rely on any label, description or job title.’  

The Government has announced its intention to extend these rules to the private sector from 2020. It has issued a second Consultation on IR35 and those who wish to contribute can do so before 28 May 2019.

What does this mean for the ‘self-employed’ status?

The IR35 rules do not mean that the self-employed status is no longer an option. It does mean though that employers with self-employed contractors may face greater scrutiny from HMRC than they have before.

There is already greater focus by HMRC on the true nature of relationships classed as self-employed. We have seen several high-profile cases reported on recently which demonstrate how HMRC is taking a much stronger stance in determining status.

In the case of TV broadcaster and presenter Lorraine Kelly, she hit the headlines with a win against HMRC and a £1.2 million tax assessment when HMRC claimed she was employed. Lorraine was able to argue that she was not an employee of ITV and was instead a self-employed freelancer. The Judge in the case ruled that the relationship Lorraine Kelly had with ITV “was a contract for services and not that of employer and employee” looking at the factual reality of the day to day relationship.

Whilst Lorraine Kelly won her case against HMRC, it does serve to highlight that every facet of the relationship will be put under the spotlight when looking at contractor relationships. It is not enough to have a written agreement in place setting out the terms of the self-employed relationship. However, this is critical as a starting point to evidencing you have a self-employed relationship.

What does IR35 mean for the private sector?

Employers should be reviewing their self-employed relationships and ensuring their contractors are in fact self-employed. The proposed changes mean that private sector businesses will also need to consider whether their relationship with Limited Companies who provide services to them could fall foul of the IR35 rules.

While one may think 2020 is some time away, as businesses are entering into new arrangements now it’s worthwhile considering future exposure and whether you should potentially employ the individual instead. This may need some time to consider and negotiate the new terms, so it is worth starting now. The risk to employers of getting this status wrong is a liability for significant back-payments of tax and NICs along with fines and interest.

Next steps for employers

If you engage with self-employed consultants or contractors, you can prepare for the changes by taking some simple steps to ensure you don’t get caught out:

  • Identify and review your consultant/contractor relationships.
  • Ensure your terms of engagement with contractors and consultants are clear and accurately reflect their true status.
  • Consider how the services are delivered and by who, then potentially change contractors or consultants into employees, possibly with zero-hour contracts or casual worker agreements with gaps between engagements to avoid continuity of service.

This is an opportunity to review what you have in place and how you operate. It will help you identify any issues and address them before HMRC do. It’s also a chance to ensure your staffing structure is fit for purpose and doesn’t expose your business to unnecessary risk.