With the changes to IR35 legislation looming, we've answered some of the most common questions we've received from our clients.
What is IR35?
IR35 is a legislative instrument used by HMRC to identify disguised employment status and counter tax avoidance by identifying and targeting contingent workers who operate like an employee.
What is going to change?
From April 2020, when a contingent worker is considered to be inside IR35:
- The ‘fee payer’ (agency) must pay employer’s National Insurance on top of the agreed rate
- The fee payer must deduct income tax and National Insurance from the worker’s pay rate via PAYE
- The end user is now responsible for assessing the IR35 status of their contingent workforce and providing
a status determination to the worker and known entities within the supply chain
- The end user and agency can be liable for unpaid tax, penalties and interest if they haven’t demonstrated
“reasonable care” during the assessment
Who's responsible for determining IR35 status? The end client, the agency or the contingent worker?
Prior to the legislation coming into effect, the contingent worker would determine their own IR35 status. However, from April 2020, this responsibility will shift to the end user. If you engage contingent workers via a fee payer (agency), it’ll be the fee payer who’ll be liable for an incorrect status determination. That being said, the end user is still responsible for assessing and determining the status of their contingent workforce.
What happens if the end client gets the assessment wrong?
If the end client determines a contingent worker’s IR35 status incorrectly, it will be extremely costly to the organisation.
If a worker is wrongly deemed as outside IR35, HMRC may launch an investigation. This could lead to back taxes, penalties and interest. If a worker is wrongly deemed as inside IR35, as demonstrated with the public sector reforms, workers are likely to increase their rates or abandon projects when they don’t feel the assessment was fair. The end user must set up a process that allows contingent workers to challenge decisions.
With both decisions, the end user needs to demonstrate “reasonable care” when making status determinations. If the end user is found to have not demonstrated reasonable care, they could find themselves liable to penalties from HMRC.
Is there a tool to help determine IR35 status?
HMRC has developed a basic online tool, CEST, to help the end user assess whether an individual is inside or outside IR35. While it can deliver a result within minutes, it has been heavily criticised as it’s provided incorrect IR35 decisions in existing IR35 court cases.
To guarantee a compliant process, we’ve partnered with several legal experts to undertake all IR35 assessments. Not only will this ensure all contingent workers have the correct IR35 status, it also leaves an audit trail of the outcome and supporting documents. They’ll also be on hand to provide legal advice and best practice moving forwards.
What is a blanket assessment?
A blanket assessment is where the end user predetermines an IR35 status decision without conducting an individual assessment and instead basing the decision solely on job description or role. Not only is this failure to take reasonable care, it also assumes the set of circumstances identified are applicable to anyone in that role, leading to wrong, unlawful IR35 determinations. Failure to demonstrate reasonable care could result in a huge tax burden for the end user.
What is a blanket ban?
To try and counterbalance risk, many organisations are applying blanket bans on all contracts. Organisations that adopt this approach will only engage workers on a “on-payroll” basis. While mitigating potential risk, organisations who adopt a blanket ban should be prepared for rising costs and recruitment challenges as workers increase their rates to offset the rise in tax or gravitate towards organisations that are prepared to engage workers outside IR35.
How should a contingent worker be treated in comparison to employees?
Every worker must be treated with respect regardless of whether they are a contingent worker or permanent employee. However, it is important to remember that contingent workers aren’t employees, and therefore shouldn’t be seen to be or treated as ‘part’ of the organisation. For example, it’s important that they don’t have staff reporting into them, attend any social events or receive any employee perks.
Where do I start?
Get in touch! With over 40 years’ experience in the recruitment industry, we’ve guided businesses both large and small through various legislative change. Our expert team at Rullion provides a complete solution that protects your organisation and ensures you have a compliant workforce.