What is IR35?
IR35 is a piece of legislation that refers to off payroll working. Also known as the Intermediaries Legislation, it was first mentioned in an Inland Revenue press release in 1999 and sought to address the tax benefits that workers were able to gain when engaging with an employer through an intermediary.
Under IR35 if a worker would be employed if not for the existence of an intermediary (their own Limited Company, Umbrella Company, self-employed status or contrived partnership) then the worker’s invoice/income is liable for NIC, IT and employers NIC payments.
From the 6th of April 2000 IR35 was approved, enacted and became law; meaning that workers were responsible for self-assessing whether they fell inside IR35 or outside IR35. However, HMRC found that this did not yield the number of payments that it expected and on the 6th of April 2017 legislation was updated so that within the public sector the responsibility for assessing IR35 status fell with the engager.
This update was deemed to be a success, and so from the 6th of April 2020 HMRC will put in place further changes that require businesses within the private sector to take responsibility for assessing their workers (except in the case of small businesses as Paul Chappell explained in our original post “Off Payroll Working in the Private Sector (IR35.)”
Who does IR35 apply to?
The IR35 regulations apply to all contractors and self-employed workers within the public and private sectors. Responsibility for assessing their working status will fall with the engager throughout the public sector and in the case of the private sector all except small businesses. For small businesses responsibility will still rest with the worker.
As we discussed in our post “Time is ticking for IR35… what do you need to do as a business when assessment becomes your responsibility?” there are a couple of options when it comes to assessing your off payroll workers.
How can you assess off payroll workers?
The first option and our recommended first port of call is the improved HMRC CEST (Check Employment Status for Tax) tool. Our Head of Legislation and Compliance Paul Chappell was involved in the testing of this tool before it was published, and as he explained in his review “Review of the new CEST Tool (Check Employment Status for Tax)” in most cases it will provide a definitive answer.
As Paul explains, in some instances CEST cannot provide a definitive answer on whether the IR35 rules apply to the worker. In these instances the tool advises you to call the HMRC helpline for assistance but we would recommend speaking with an independent expert before doing so. Paul is available for consultancy services so if you require assistance assessing your workers please get in touch.
IR35 penalties for non-compliance
Failure to comply with IR35 can result in some hefty penalties – and not just for engagers who ignore off payroll working rules altogether. There can be penalties even if some attempt has been made to assess your workers but status has been incorrectly calculated which is why we recommend speaking with an expert if you are unsure.
In our most recent post in our IR35 series “IR35 Compliance – As an engager what are the costs of getting it wrong?” Paul Chappell explains the various criteria that HMRC will consider and what the possible penalties could be.
The behaviours that will be considered are reasonable care which carries the lowest penalty, careless, deliberate but not concealed and deliberate and concealed which carries the highest penalty. The penalties range from 0-30% of the tax and NIC liability to 30-100% plus a charge for late payment.
With penalties at risk it is therefore always safer to err on the side of caution. Use the CEST tool and if an outcome is not generated speak with an independent expert before contacting HMRC. Whatever you do, if an outcome is generated by the CEST tool do not ignore it.
With this in mind and off payroll working making big news, Paul delved into the Tax Tribunals to take a look at the outcome of IR35 cases in his recent post “IR35 – A Tax Tribunal Summary.”
Two recent high profile cases are those of Lorraine Kelly and Christa Ackroyd. Both are TV presenters, Lorraine had editorial control whereas Christa didn’t yet Lorraine won her case and Christa lost.
Looking back at the Ready Mixed Concrete Case of 1968 the factors that are used to determine employment are Mutuality of Obligation, Substitution and Control. If there is no mutuality of obligation there cannot be employment, if an effective substitution can be provided there cannot be employment and if there is no control over how, why, where, when and what work is done there cannot be employment.
These cases highlight inconsistencies in the way that HMRC are policing IR35 rules, reaffirming the importance of doing everything you can to ensure that you are assessing your off payroll workers and in good faith.