Up until now, IR35 legislation has looked after the taxation relating to contractors. However, in April 2020, IR35 is set to be replaced with a new Off-Payroll Tax which will be used to identify ‘deemed employment' status. 

To assist with a smooth changeover, the Government is currently undertaking a review of the new legislation. This may result in some minor changes to proposals. The review will be complete and we will know the outcome in mid-February, however, if they go-ahead largely as planned, certain organisations hiring contractors or freelancers will need to take action.

IR35 was first introduced in April 2000 and was intended to ensure that individuals who provide their personal services through Ltd Companies, but in reality are ‘disguised employees' are taxed accordingly.  This usually occurs where there might be a freelancer or contractor who has set up as a limited company but only provides services to one client organisation, so they are acting more like an employee.  IR35 affects these staff as it means they needed to pay tax and National Insurance contributions just as if they were employed. 

From April 2020, the new Off-Payroll Tax will replace IR35 for medium and large companies. To qualify as a small company, two of the following three conditions need to apply;

  • turnover of £10.2m or less;
  • £5.1m or less on its balance sheet; or
  • 50 employees or less.

Historically it has been the ‘worker' that has needed to determine whether IR35 applies, and in the event of an HMRC enquiry it is the ‘personal service company' that they would pursue for the underpaid tax/NI. A key point is that the responsibility for assessing contractual engagments will now shift from the contractor to the employer or client. 

Genuinly self-employed contractors and their clients should have nothing to fear but contracts and the nature of tasks need to reflect the correct working relationship. For example, a genuine contractor can turn down work, and won't have paid holidays or sick pay or a workplace pension unlike an employee. 

So if you employ contractors it will be your responsibility to do a CEST test - a check for employment status for tax for each contractor.  A blanket approach is unacceptable, so each individual contractor will need to be assessed. As the employer, if the contractor is deemed as an employee, you will now be liable for some tax liabilities including Employers National Insurance at 13.8% so it is important to clarify the situation correctly.

There are actions that can be taken, contracts can be reviewed and clarified or contractors can work through umbrella organisations. The new rules will be the biggest change to the IR35 regulation since it was introduced two decades ago. 

At d&t we are always happy to provide advice about tax for our clients so if you are worried about these new regulations then please contact us and we can help you clarifiy contracts and ensure your organisation remains compliant.

For further information please visit:  www.team-dt.com