Busy preparing your agency ahead of the IR35 reform date but still have some unanswered questions?
You’re in luck, TBOS have put together our very own IR35 FAQ’s for recruitment agencies.
WHAT IS IR35?
IR35 is the name given to tax legislation in the Income Tax (Earnings and Pensions) Act 2003 and was originally introduced in response to the growth of ‘disguised self-employment’ and to combat tax avoidance.
IR35 applies to contracts worked through an intermediary, such as a limited company or Personal Services Company (PSC).
Irrespective of the way in which they work, IR35 was introduced to ensure that contractors which work in the same way as employees pay broadly the same taxes as actual employees.
WHEN WILL THE NEW IR35 LEGISLATION TAKE EFFECT?
Subject to approval, the new IR35 rules will come into effect on April 6th 2021 for contractors working in the private sector.
Contractors working in the public sector have already been subject to these changes which were brought into effect in 2017.
WHAT’S SET TO CHANGE WITH THE LEGISLATION?
It’s important to understand that IR35 has not changed, but the way it is administered has.
As it stands currently, the onus is on contractors working in the private sector to establish whether their work is subject to IR35, however from April 2021, it will be the obligation of the end-client to check rather than the contractor.
HMRC have confirmed in February 2020 that the new rules will now only apply to payments made for services provided on or after 6 April 2021.
Previously, the new rules would have applied to any payments made to the PSC on or after 6 April 2021 irrespective of when the services were performed or the invoices were raised.
WHY HAS THE IR35 LEGISLATION CHANGED?
These changes have been introduced to ensure that contractors working via an intermediary are contributing fairly to the tax system by not ‘avoiding’ employment taxes or National Insurance Contributions (NICs).
HOW DO MY END-CLIENTS ASSESS THE EMPLOYMENT STATUS OF A WORKER?
Most end-clients will use the ‘Check Employment Status for Tax’ (CEST) tool designed by the HMRC, and there are a number of tools they can use.
The determination is provided to the agency (who in-turn will provide this to the candidate) by the end-client way of a Status Determination Sheet (SDS)
The SDS will give the result and the reasons why the client believes that the placement is inside or outside IR35.
MY END-CLIENT HAS DETERMINED THE CONTRACT AS INSIDE IR35, WHAT HAPPENS NEXT?
If it’s determined the contract is inside IR35 then the placement has been deemed to be an “employed” placement.
This means the agency can pay to an approved umbrella companies or be paid via the agency’s PAYE scheme. This means that the funds paid by the agency will be subject to deductions including income tax and NICs from the agreed pay rate and this may affect the candidates take-home pay.
There is a third method of paying the candidate to their own limited company but income tax and NIC contributions must be deducted and reported to HMRC before the payment is made to the limited company bank account.
MY END-CLIENT HAS DETERMINED THE CONTRACT AS OUTSIDE IR35, WHAT HAPPENS NEXT?
If it’s determined the contract is outside IR35 then the placement has been deemed to be a “self-employed” placement.
This means the agency can continue to pay you either on the agency PAYE scheme, via an approved umbrella company or pay via the contractors limited company without PAYE deductions.
WHAT IF I DISAGREE WITH MY END-CLIENT’S IR35 DETERMINATION?
If you disagree with an IR35 determination, it is possible to appeal their decision. The end-client will have 45 days to respond and can either change their determination, providing the agency and contractor with a new statement, or stand by their original determination and give an explanation.
There is no further appeal process if the end-client stands by their original decision.
ARE THERE ANY EXCEPTIONS TO THE IR35 RULES?
The rules only apply to large and medium businesses and not those classed as a small business. In the case of a small business, they will not need to determine the status of the contractor in order to minimise administrative burdens.
During a 12-month period, a business is deemed to be a ‘small’ company if it meets 2 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
DO THE RULES APPLY TO INTERNATIONAL PLACEMENTS?
International placements where the contractor is working outside of the UK would not be subject to the changes in IR35. However, the candidate would be subject to the tax rules within the country they are working and if they are deemed to be a UK tax resident during that time then they may also be included within the IR35 legislation.
HOW IS MY RECRUITMENT AGENCY AFFECTED BY THE IR35 CHANGES?
Recruitment agencies are responsible for the payments made to contractors, as such, they will carry the IR35 liability when the new rules are enforced. This has also been the case in the public sector since 2017.
ARE WORKERS BEING PAID VIA AN UMBRELLA COMPANY AFFECTED BY THE LEGISLATION?
No. The changes to IR35 only apply to contractors working via a limited company and not to those working via an umbrella company.
IF WORKERS ARE DEEMED AS AN ’EMPLOYEE’ FOR TAX PURPOSES, DO THEY QUALIFY FOR EMPLOYMENT RIGHTS/BENEFITS?
Unfortunately, not. If your contract is deemed to be inside IR35, then you will be taxed as an employee, but will have none of the statutory employment rights associated with traditional workers. However, if you work through an umbrella company you will receive some employment rights, such as holiday pay.
WHAT HAPPENS IF I HAVE MULTIPLE CONTRACTS WITH MULTIPLE END-CLIENTS?
IR35 applies to a contract, not a person. So, you may find that one of your contracts falls inside IR35 rules, whereas another may fall outside.
IS THERE ANY WAY TO BYPASS THE NEW RULES?
You are unable to get around the IR35 reforms. We strongly advise contractors to avoid any type of ‘tax avoidance’ scheme, as you may well be forced to repay any unpaid tax, plus penalties in a future HMRC investigation.
MORE IR35 SUPPORT
If you would like more information regarding IR35, TBOS have a number of FREE resources you can find here. Additionally, if you would like some assistance processing and paying your contractors now or after the reform date, TBOS can help. Please call our office for more information on this service.