IR35 – DEAD OR ALIVE?
The IR35 rules have been the hot topic of conversation recently which has caused confusion around the position of the law and what companies must do to comply with them.
What is IR35?
IR35 is a tax legislation that was implemented to prevent ‘disguised employees’ from avoiding tax by supplying their services to clients through an intermediary, such as a limited company. This meant that any contractors who do not meet HMRC’S definition of self-employed would have to pay the same income tax and national insurance contributions as an employee to prevent the abuse of the HMRC’s taxing system.
However, this was widely criticised due to the uncertainty around the rules of IR35 particularly after the private sector reform in April 2021. Prior to this reform the onus was on the contractor to determine if they were subject to IR35 rules, however, the government did not think this was sufficient in preventing the tax avoidance, which led to the responsibility being placed on all large and medium-sized businesses to classify the employment status of the contractors which resulted in additional administrative processes to ensure compliance.
The issue with IR35
Businesses did not want to undertake the potential risk of a fine by stating that an individual was a contractor, as most businesses are unsure what distinguishes an employee from a self-employed worker. Businesses would rather avoid any complications and assume the individual was an employee which is known as the blanket approach, or they would stop working with contractors to avoid any tax liability and paperwork.
This had a detrimental effect on those who were genuinely self-employed workers, it was estimated that 35% of 500,000 freelances were no longer self-employed workers, as the IR35 rules resulted in their take home pay being reduced by 15-20% as business would place them onto the companies pay roll which would make the individual liable to employment taxes.
Is there an IR35 reform?
During the September Mini budget The Chancellor announced that from April 2023 businesses would no longer have the responsibility of determining an individual’s employment status, he believed that returning to the system where contractors determine their own employment status and supply the business with an invoice of their fees would benefit both parties as those who are genuinely self-employed will not be subject to employee taxes and businesses would free up time and money from tedious compliance tasks.
However, Jeremy Hunt the new Chancellor has announced that the government will no longer be going ahead with the reform, which means businesses will continue to have the responsibility to ensure they are complaint with the IR35 rules.
IR35 and compliance
As a business you must determine if the individual is inside or outside the IR35 rules. An individual is deemed inside the IR35 rules if they would be considered an employee, but for their intermediary. if they are deemed inside the rules, it would mean they would be subject to the same taxes as an employee. An individual is deemed outside the IR35 rules if HMCR sees you as self-employed, and you will be liable to pay their own taxes. However, if you are considered as operating outside IR35 rules the HMRC can still enquire about the legitimacy of your employment status, if HMRC finds that you should be inside the IR35 rules the individual and the business will have to pay the HMRC the tax and National insurance contributions due, as well as any interest that has occurred on these amounts. If HMRC believes that you were not reasonable in completing your tax and National Insurance contributes you may also be subject to a financial penalty.
How can I avoid IR35 penalties
If you are worried that you may not be complying with the IR35 rules, we can assist you to determine if the individual would be deemed inside or outside the IR35 rules, this will allow you to ditch the blanket approach which will save you time and admin work. We will ensure that you understand how to be compliant in the most effective way which can be done by creating consultancy agreements with self-employed individuals to prevent any confusion regarding their status or by giving you general advice to help you understand the complex laws and regulations around IR35.
To make sure your business is complaint with the law get in contact with one of the experts at Rinew Legal here and we can make sure your business is following the IR35 rules.