Since a modification on IR35 was announced a couple of months ago, we have received a number of questions from our readers who don’t know what IR35 is and how it affects them. So here’s what you can expect from the changes introduced in IR35 this 6th April 2020.
First of all, what is IR35?
IR35 was first introduced by HMRC in 2000 as a way of fighting tax avoidance. It intends to identify workers disguised as contractors in an attempt to take advantage of the fact that the company hiring them won’t need to pay National Insurance taxes for them.
What is a ‘disguised employee’?
A disguised employee is any contractor that, supposedly working through a limited company, works as an employee de facto. However, sometimes the contractor could not be aware that HMRC would consider them a disguised employee, as this is often a strategy undertaken by the hiring company, who, after all, won’t be suffering the consequences of being caught as such.
Nevertheless, it’s really important that the contractor revises the conditions of their contract, such as:
- Mutuality of Obligation: work exclusivity
- Regular, guaranteed work
- No right of substitution clause
- Supervision and control over their work and working hours
These factors could make a contractor fall into IR35, but it’s a complicated matter. In these cases, it’s always good to count on expert advice from agencies like Empiric.
How do the changes in IR35 affect contractors?
In previous years, the contractor had to prove that they were outside IR35 (this is, they weren’t working in the same conditions as an employee, despite their title of freelancers or contractors) according to the above mentioned criteria. However, it’s the hiring company who will have to decide who falls in or out of IR35 from 6th April 2020. But as a contractor, you would still need to show “reasonable care” and make and keep sufficient records to provide a complete and accurate return.
Besides this, HMRC goes on to say that to demonstrate reasonable care, a taxpayer should check “the correct position when you don’t understand something”. This suggests that contractors who choose to undergo an IR35 contract review for each assignment could be demonstrating reasonable care.
How do the changes in IR35 affect employers?
The requirement of the legislation states that all companies must take ‘reasonable care’ when assessing if roles are inside or outside of IR35. Taking a ‘blanket approach’ to assess all roles won’t deliver this.
The potential financial penalties can be significant if incorrect steps are implemented. These are some examples of the penalties you as a client company could be facing if a contractor is found inside IR35:
- Fines of over 50% on top of the contractor’s salary
- HMRC could also charge additional fines and interest on outstanding liabilities
- Going forward, fines could be backdated up to a maximum of 4 years back to April 2020
- Business performance could be affected due to a lack of resources if a contractor’s position has not been defined and resource
Nonetheless, examining if your contractors’ contracts are compliant with IR35 is not an easy task. That’s why agencies as Empiric offer IR35 solutions for all companies and contractors finding trouble in understanding these changes. A good help for all those who are not experts in legal and financial matters.