Changes to Using Contractors in the UK (IR35)

From 6 April 2020 the rules around private sector companies using contractors is changing. Although the UK Government has announced a last-minute review, the introduction of the new legislation is unlikely to be delayed or changed in any meaningful way.

From 6 April 2020 the rules around private sector companies using contractors is changing. Although the UK Government has announced a last-minute review, the introduction of the new legislation is unlikely to be delayed or changed in any meaningful way.

Background to the legislation change

IR35 legislation (also referred to as off-payroll working rules) determines whether an individual working via a UK limited company should be classified as 'self-employed' or an 'employee' for tax purposes. It only affects contractors that are working through their own company. Individuals contracting in their personal name are not caught by IR35.

When it was first introduced many years ago, the onus was on the recipient of any payment (the contractor) to decide whether the IR35 rules applied and if so, to make an adjustment to their own tax return that increases the taxes due. Unsurprisingly, this was not very successful and very few IR35 adjustments were made. HMRC (HM Revenue & Customs) has monitored this over the years and, during 2017, for contractors engaging with any UK public body the rules changed and switched the decision from the recipient to the payer. This meant that the public bodies took on the risk of any default. Because of the potential for penalties for getting it wrong, the payers took it far more seriously than the contractors did under the old rules and the changes were considered a success by HMRC. After the success of the change, it was only a matter of time before HMRC decided to apply the changes to all relationships, both public and private sector.

Failure to correctly clarify the IR35 status of contractors after the new rules come in could lead to financial penalties and exposure to increased cost for businesses, putting them under great pressure to get it right. As a result of this, concerned organisations may choose to 'play it safe' and engage fewer contractors, or decide that many contractors are now deemed an employee for tax purposes.

Which companies are affected by the new rules?

These regulations will only apply to medium and large companies. Small companies engaging with contractors will not be responsible for determining the IR35 status of those contractors and instead the old rules remain in place, so the risk remains with the recipient rather than the payer. More information on what HMRC define as a small company for this purpose can be found here.

How do I assess whether my company is caught by this?

If you have any contractors that you want to “test” to see if they might be caught by this, you can use the Check Employment Status for Tax (CEST) IR35 tax calculator. The CEST tool is HMRC's recommended starting point, as the determination is a complex one involving various factors including, but not limited to:

  • the level of control exercised over the contractor;
  • the duration of the engagement;
  • the level of shared financial risk; and
  • the right of substitution.

HMRC has acknowledged the limitations of the CEST tool, so it would be advisable to undertake your own detailed review of each individual case.

What next?

As of April 2020, companies using contractors will actively have to assess the status of each contractor and must provide that assessment (called a Status Determination Statement or SDS) to the contractor. Contractors have the right to appeal against an SDS issued by company end users.

If the conclusion is that actually the nature of the engagement is similar to that of employer and employee, the contractor payments will need to accounted for via payroll which also involves special rules and an additional cost of Employers National Insurance at 13.8%.

If you would like more information about how the IR35 legislation could affect your company, please contact:

Carla Graves
Director
Tel: +44 (0)20 7404 4140
Email: cgraves@fitzandlaw.com

Tim Baker
Director
Tel: +44 (0)20 3667 5971
Email: tbaker@fitzandlaw.com

As seen in


AA.png TFT.png CNN.png RAC.png ECO.png SU.png EMM.png TCN.png