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Why it’s so important to stay on top of IR35 changes

IR35 is a set of tax laws that form part of the Finance Act
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IR35 is a set of tax laws that form part of the Finance Act
Sandhya Iyer - HR Dept Sevenoaks Tonbridge Tunbridge Wells by Sandhya Iyer - HR Dept Sevenoaks Tonbridge Tunbridge Wells
Director - HR Dept Sevenoaks Tonbridge Tunbridge Wells

Sandhya Iyer of The HR Dept gives us a whistle-stop tour of what April’s changes are likely to mean for SME owners and explains how best to ensure neither you, nor your contractors, receive any nasty surprises come spring.

Changes afoot

I’m sure most of you must love listening to the radio. In doing so, besides waiting with bated breath for more news on the Royal Family’s negotiations with the Royal or not-so-Royal couple, Harry and Meghan, you may have also heard about the HMRC’s changes to IR35. IR35 is a set of tax laws that form part of the Finance Act. These laws were until date applicable mainly to the public sector since April 2000. With effect from April 2020, however, this regulation now extends to the private sector and some SMEs.

For those of you who may ask, “who has the time to keep on top of HMRC and employment law updates?”, People Management Magazine sums up the situation as follows:  “IR35 legislation aims to ensure workers undertaking similar roles in the same organisation pay the same tax, regardless of whether they are an employee or a contractor working ‘off payroll’. Employers using contractors who are covered by IR35 are required to deduct income tax and national insurance from their pay as if they were an employee.”

Does your company fit the criteria?

To be specific, during a 12-month period, a business is deemed to be a ‘small’ company if it meets two or more of the following criteria:

  • Turnover – not more than £10.2 million
  • Balance sheet total – not more than £5.1 million
  • Number of employees – no more than 50

I hear you breathe a sigh of relief because you don’t meet any of the above requirements to be covered by IR35. However, the risk still remains for SME’s from ‘contractors’ or ‘consultants’ who work off payroll, if and when the latter, or the SME itself, gets audited by HMRC. As you would expect, HMRC is pretty hot on this now with pulling up accounts of self-proclaimed consultants, who choose to be off payroll. In simple terms, if it is established that these ‘consultants ‘ or sub-contractors are earning an income from just one or two businesses on a consistent and sustained basis, they are employees as far as HMRC is concerned. Similarly on the employment law side of things, there have been some famous cases in the public sector, such as that involving Pimlico Plumbers where, further to a claim brought by the contractor against the business, a self-employed contractor was deemed to be a worker by Employment Tribunals.

Where contractors in the public sector are deemed to be employees, PAYE taxes and NI become payable to HMRC – in one lump sum. What this means for an SME business owner is that you are then at risk of back pay claims for annual leave from that same contractor, and they’ll have other employee or worker rights. 

The HR Dept of course is lobbying very hard with Parliament to try to be more realistic when it comes to applying off-payroll and IR35 restrictions to the SME sector, based on the reality of what is happening in practice and the changing ways of working. However – and despite appeals from campaigners to rethink the situation - the advice from the CIPD and the Treasury is to prepare as if IR35 will come into effect in April 2020 – see here for more information.

To cherry pick from the website above, in a nutshell:  “IR35 legislation aims to ensure workers undertaking similar roles in the same organisation pay the same tax, regardless of whether they are an employee or a contractor working ‘off payroll’. Employers using contractors who are covered by IR35 are required to deduct income tax and national insurance from their pay as if they were an employee”.

What you need to consider

  1. It is the choice of neither the business owner nor the contractor as to whether or not someone is deemed a consultant. It is the historic working relationship and the demands of your business that determine employment status. If you have a contractor who does not wish to forego their contractor status, you need to review your risk appetite for such an arrangement to continue, as keeping someone as a contractor when they truly are not may not go down well with HMRC or tribunals, should you be faced with claims.
  2. Review the hours spent by your contractors on your business and establish if there is a sustained need for them – albeit occasionally ad hoc. If the answer is yes, then it may be worthwhile considering putting them on a variable hours contract, for example (not recommended to be applied as a rule, without seeking professional advice), rather than retain them as a consultant or a zero hour worker. Sometimes, it may be that a worker agreement rather than contractor status is the best option for risk-averse business owners. If unsure, the HR Dept will be happy to assess the right course of action for your business and advice next steps. While a change in situation may require you to deduct NI and income tax, the prospect of being faced with claims from the same contractor following an HMRC audit might prove far more daunting by comparison.
  3. Once you have established the correct employment status for your contractor, have a chat with your accountant to work out the figures.
  4. Get a professionally drafted contract template for your permanent staff or workers, depending on the employment status that is determined.

Obviously, I’ve attempted here to simplify what is a very complex area of employment law. The HR Dept will be running a series of workshops in February and March 2020 specifically with a view to clarifying the issues surrounding April 2020’s IR35 changes, so check my website for details.

As always, keep calm, keep listening to the radio (and reading the newspapers) and remember that forewarned is forearmed! 

Make sure you, your staff and your contractors are up to speed with the implications of changes to IR35. Yes, it might seem a hassle to seek expert advice now and to change the employment status, if required, of contractors, but failure to do so could result in far greater hassles further down the line.

MEET THE EXPERT

Sandhya Iyer is the director of the HR Dept, helping small- and medium-sized businesses in Tunbridge Wells, Tonbridge and Sevenoaks, Kent.  A graduate member of the Chartered Institute of Personnel and Development, she works with business owners, entrepreneurs and managers to prevent people problems and help them get the best from their staff.

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