IMPORTANT UPDATE: Due to COVID-19, the government has delayed the intermediaries legislation (IR35), pushing it forward to April 2021.
Chief secretary to the Treasury Steve Barclay reportedly said that this is a deferral in response to the ongoing spread of Covid-19 to help businesses and individuals.
“This is a deferral and not a cancellation, and the government remains committed to reintroducing this policy to ensure people working like employees but through their own limited company pay broadly the same amount of tax as those employed directly.”
Financial Secretary to the Treasury Jesse Norman added: “We will do whatever it takes to support the British economy through Covid-19.”
What is IR35?
HMRC is changing your responsibilities if you are using self-employed workers through middle-men. This could be an intermediary party such as staff agencies. The law, which is called the intermediaries legislation (IR35), relates to the treatment of tax on businesses that operate with self-employed workers.
While Syft workers do not fall in the scope of IR35, we spoke to legal and tax experts to help your business prepare and consider its next steps.
Here is a quick guide to understanding the reasons for IR35 and quick takeaways so you know exactly what to do.
Why is the IR35 legislation in need of updating?
The legislation aims to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries. The way the current legislation is put in place provides a loophole, making it possible for tax and NICs avoidance possible through the use of intermediaries, such as Personal Service Companies or Partnerships, where an individual could be regarded as an employee.
STEP 1: Check if your company is liable for IR35.
You can do this through the government website. It is worth noting that only Large and Medium enterprises are held liable. If your business is classified as a Small business, it will only be your contractor who will be held liable.
STEP 2: Identify how many contractors your business engages with.
This includes any contractors or freelancers your business directly engages with or casual staff that you engage with through staff agencies.
STEP 3: Establish your workers’ status: Employed vs Self-Employed.
Communicate with your suppliers to understand if they are self-employed as a sole-proprietor or through a one-person limited company. Factors to consider include the genuine terms of the contact, the control of the worker’s freedom of when, where and how the tasks are carried out, and financial risk. You can read the ins and outs of establishing the status of the workers here.
STEP 4: Ensure you are IR35 compliant.
After establishing their employment statuses, ensure the contractors or suppliers are IR35 compliant by asking your finding out if they are paying the correct taxes, as well as NICs from the payments you invoice to them.
STEP 5: Get expert support to review your contracts with workers.
If required, you should seek legal advice to review your contracts with any contractors or suppliers to ensure they meet the requirement for IR35.
“IR35 is updated to close the legal loophole,” say experts.
The legislation aims to eliminate avoidance on tax and National Insurance Contributions (NICs), which is where the current legislation has its loophole. As it stands at the moment, businesses can do this with the use of agencies or other forms of intermediaries.
“The law that comes into action in April is not new. HMRC has been developing ways to categorise contractors and other flexible workers since 2000,” says Matthew Fryer, Group Compliance Director at Brookson.
Fryer explains that the law came into place to combat tax avoidance two decades ago: “Twenty years later, we’re looking at an approximate of 60,000 limited companies being set up providing one-person services.”
By moving the liability up the ladder from the worker beyond the agency, end clients will now be more efficient in only working with workers who are on PAYE or service providers who are compliant with IR35 (if they fall within the scope).
You want to know why IR35 matters to your business
As the responsibility now passes on to end clients of services, your business will also be held accountable in any instances where tax avoidance or NIC avoidance takes place. Your business has the obligation to make employment status decisions, coming forth to HMRC with an evaluation of whether you deem your flexible workers as either employed or self-employed.
Take it from a senior manager at business advising company Menzies, Andrew Brookes. Brookes, also a previous HMRC Executive Officer, says that the legislation draft is still in early stages and that it’s too early to see how thoroughly HMRC will trackback five years of compliance.
“We haven’t seen anything go to tribunal yet in the private sector. But in the public sector, we have seen the Lorraine Kelly case, as she worked as a contractor through a registered limited company,” he says.
According to HMRC, a business will only be held liable if it qualifies as an M/L business or if it is a public sector. For your business to be considered as an M/L enterprise, it must satisfy two of the following requirements:
- Turnover of more than £10.2 million
- Hold an asset of more than 5.1 million
- Have more than 50 employees.
If a worker provides services to a small client in the private sector, the responsibility of deciding the worker’s employment status will be held by the worker’s intermediary.
Syfters are IR35 compliant as we handle all payments on PAYE
One of the options for your business to be IR35 compliant is to bring onboard workers as PAYE or ensure the agencies you book staff with are compliant, which could be time-consuming and make your business liable if the agencies failed to meet the obligations.
Flexible workers at Syft are treated as employees (agency workers). Syft manages the payroll, NICs, and pensions for all Syfters on the platform. By using Syfters, your business will remain the flexibility that hiring workers through agencies brings while making sure that your casual staff are IR35 compliant.