IR35 – Is your organisation up to speed?
Any contractor, or organisation commonly engaging contractors, will be aware of the extension to the off-payroll rules (commonly referred to as IR35) that came into place on 6 April 2021.
These rules already apply to contractor engagements with the public sector, but now apply to medium and large private companies. These are companies that tick 2 of following 3 boxes:
- they have over 50 employees;
- their turnover is in excess of 10.2 million;
- or their assets or balance sheet is in excess of 5.1 million.
The changes have been designed by the government to crack down on what HMRC deem to be a form of tax avoidance. They believe that many organisations are engaging contractors, who work through an intermediary company, to effectively work as employees. The result is that the contractor will be paid a dividend through the intermediary company and HMRC misses out on the employee income tax and national insurance contributions that would normally be paid through PAYE. In fairness to HMRC, they are probably not wrong in a number of instances, particularly as the definitions of employee and workers continue to widen.
What are the changes?
Previously it was up to the intermediary company (effectively the contractor) to decide if they were self-employed or not. The intermediary company has a tax incentive to declare themselves to be self-employed. As of the 6 April 2021, the onus is now on the organisation receiving the service (the “client”) to decide. They have less of an incentive to manipulate the facts of the working relationship, although the client will still be keen to avoid its contractors obtaining employment rights if possible. With every engagement, the client must provide a “Status Determination Statement”, confirming to the contractor whether they fall inside or outside the IR35 rules. This statement will be accompanied by a “Check Employment Status for Tax (“CEST”) test carried out through the government website.
How accurate are the Check Employment Status for Tax tests?
Employment status, as proven by the requirement of a judgment from the Supreme Court in the recent Uber case, is currently a difficult grey area. It requires an analysis of the individual facts in any case. In its early stages, the CEST tests were met with criticism for being too black and white. It should however be pointed out that of the 24 tax tribunal decisions on IR35 last year, the CEST test would have been correct in 22 of them. With HMRC placing a heavy reliance on these tests, it is anticipated that their functionality and accuracy will continue to improve, however with the laws on employment status as they currently are, it will be impossible for an easy to use test to guarantee how a particular relationship will be interpreted by the tribunals. Parties, in turn, will likely also learn ways to manipulate the test results, which may or may not be reflective of the real life situation.
It will be interesting to see how closely HMRC monitor any arrangements deemed to be outwith IR35. In the initial period, we suspect that clients will err on the side of caution, and the number of contractor engagements to reduce significantly.
What are the factors to be taken into consideration?
Whether the CEST tests are likely to be accurate or not, the employment team at Balfour+Manson handle queries on employment status regularly, and have seen first hand the factors taken into consideration by employment tribunal judges. As mentioned, the IR35 rules kick in when a tax tribunal judge considers the actual arrangement between the contractor and end client to be one of employment. The intention of the contractual relationship will always be one factor for consideration, but a judge will be required to look beyond this. Here is a non-exhaustive list of reminders of the types of things a judge will be looking at to decide if IR35 should apply or not:
- Who is telling the contractor what to do? If the contractor does not have free licence to complete the task as they deem appropriate, they could be an employee.
- Does the contractor have to do the job themselves? If they cannot provide a substitute, at their own discretion, they could be an employee.
- When is the contractor required to work? If they cannot carry out the work in their own time, they could be an employee.
- Who is providing the tools? If the client provides the tools or IT equipment, the contractor could be an employee.
- Is the contractor integrated as part of the client’s company? Are they invited to staff parties or do they have a client email address? If so, they could be an employee.
- Can the contractor be subject to disciplinary action by the client? If so, they could be an employee.
At the moment, employment status is not a walk in the park, and it has large implications on tax and employment rights. If you have any concerns about your, or your contractors, status, then please contact the team at Balfour+Manson.