IR35 AND EMPLOYMENT STATUS
I am sure you have all been hearing about the changes to the payment of contractors within the public sector and wondering how it will affect the services you receive. Essentially HMRC believe that a considerable amount of revenue is being lost through contractors claiming to be self employed and utilising Personal Service Companies (PSC), Managed Services Companies (MSC) and other entities. HMRC argue that if the contractor is working through a PSC, MSC or similar entity but fulfilling a role under the same conditions a PAYE employee would have been employed under eg set working hours, supervised work etc (See below for more information) than the engager is responsible for deducting PAYE and placing this person on their payroll. The contractor is within the scope of the IR35
Who is the Engager? The engager is the party with the nearest relationship to the intermediate (PSC, MSC etc). Hence if your contractors use a PSC, MSC or other entity and invoice you directly you are responsible for deducting PAYE and liable for any unpaid PAYE if it can be proven that the contractor is inside the scope of the IR35
However, any staff provided through and by Gray & Associates will not be your responsibility. Gray & Associates have the nearest relationship with the intermediate and will therefore be responsible for ensuring any HMRC liabilities are met.
An individual’s employment status, i.e. whether s/he is employed or self-employed, is not a matter of choice. It depends on the terms and conditions of the relevant engagement that they are working on. HMRC has developed a series of tests and introduced legislation to deal with the avoidance of tax and NIC by individuals who claim to be self-employed but who are not.
Added costs of employing a contractor directly – Although HMRC expect to increase revenue through tax collection it is the increase in Employer’s NI payments which will show the most significant increase. Hence contractors you employ directly through PSC’s,MSC’s or other entities which now fall inside IR35 will now cost you significantly more once added to your payroll. Other factors that will financially affect you include
- Liability to pay ER’s NI
- Adjustments to your organisations payroll to accommodate a fluctuating work force.
- Dealing with contractors tax queries. Most contractors do not have a tax code. HMRC have advised they would be placed on BR or OT which basically means they will be on emergency tax. This could take months to sort out leaving workers financially worse off and disgruntled.
- The Apprentice Levy – This legislation means all organisations with a payroll of £3 million plus must may 0.5% of their total payroll costs to this new tax. The term ‘staff’ includes any contingency staff.
When does this come in to effect? The legislation comes into effect on 7th April, the start of the new tax year. HOWEVER, it comes in to effect for any payments made from 7th April regardless of when the work was carried out. Hence if the contractor worked for you in March but does not invoice you for this work until April this payment must be reviewed under the terms if IR35.
How can you ensure compliance with IR35? HMRC do recognise that there are some truly genuinely ‘self employed contractors’. As a starting point, you will need to consider the facts of the relationship between yourself and any directly employed contractors/companies in any proposed assignment. I will use the term contractor to mean both in this document. Any contractors supplied by or working through G&A will be assessed by us and we will ensure they are complaint with IR35. Remember it is the intermediate with the nearest relationship to the contractor who assumes liability thus you can be reassured our compliance procedures are stringent.
Some of the details that need to be investigated/met to determine if a business entity exists inside or outside IR35 are:
- Business premises- Does the contractor rent business premises which are separate both from their home and end client’s premises?
- PII – Does the contractor have/need professional indemnity insurance?
- Efficiency – Does the contractor have the opportunity in the last 24 months to increase their business income by working more efficiently? For example having a fixed price for a project and finishing it early.
- Assistance – Does the contractor engage any workers who bring in at least 25% of their yearly turnover?
- Advertising – Has the contractor spend over £1,200 on advertising in the last 12 months?
- Previous PAYE – Has the contractor been engaged on PAYE employment terms by you within the 12 months which ended on the last 31 March?
- Does the contractors business have a business plan with a cash flow forecast?
- Does your business have a business bank account, identified as such by the bank, which is separate from your personal account?
- Client risk – Has the contractor been unable to recover payment for work done in the last 24 months
- Does the contractor invoice for work carried out before being paid and negotiate payment terms?
All of the above can be challenged by HMRC but the points on which most tribunal cases are won and lost are on the evidence to support the following points:
- Is the self-employed worker subject to supervision, direction or control from any of your staff?
- Right of substitution – Does the contractor have the right to send a substitute?
- Are you satisfied that they pay the required level of Tax and NI
Careful consideration should be given to employing any contractors on any basis outside of PAYE. Here at Grays we are working with our clients and contractors to ensure they are compliant to work outside IR 35 or if found to be non-compliant the contractors are moving to PAYE.
The deadline is fast approaching. Don’t get caught out.
For further information on how we can help you or if you have any questions please contact:
Gray & Associates Recruitment Services
020 8349 8570