The intermediaries legislation, commonly referred to as IR35, was introduced in 2000. It requires individuals working through their own Limited Company (an intermediary) to pay broadly the same amount of tax and National Insurance Contributions (NIC) as employees. IR35 applies in situations where the individual would have been an employee if they had provided their services directly.
The responsibility has, until now, always fallen on the individual worker to consider whether IR35 applied and whether their earnings should be subject to tax and NIC. However the revised legislation places the responsibility fairly (or not) and squarely at the door of public bodies to ensure that people working for them are paying the correct amount of tax and NIC.
What is a public body? A public body for the purposes of the revised legislation is any organisations that are Public Authorities for the purposes of the Freedom of Information Act (FOI) 2000. The FOI defines the public sector under very broad categories to ensure a catch all position. Those categories are:
- Government Departments, armed forces
- Local Government
- Schools and further and higher education institutions
- Other public bodies
- Publically owned companies
So all employers within the NHS, doctors surgeries and Local Government as an example, are therefore caught by this legislation.
When does the new legislation apply?
From 6 April 2017. However if work is completed before 6 April 2017 but payment is made on or after that date, it will be caught by the new legislation.
What do you need to do?
Put simply, consider the employment status of all Limited Companies that you engage. To do this you will need to:
- Review all contracts with intermediaries and advise the worker whether the new rules apply or not
- If the new rules do apply, deduct income tax and NIC
- Pay the balance after deduction to the worker
- Pay the tax, employers NIC and employers NIC to HMRC
You will note that in addition to the deductions from the worker of tax and NIC, you will also be responsible for employers NIC. This will increase the cost to you of engaging the worker by 13.8%, a cost that you may not have budgeted for. A further budget consideration will be the Apprenticeship Levy, if you payroll costs exceed £3 million per annum.
How will you know if an engagement is covered by the revised legislation?
HMRC have an online tool called the Employment Status Indicator (ESI). This tool has always been available for employers to clarify employment status issues. However HMRC have updated the ESI to provide employers engaging incorporated workers with a ‘real-time’ HMRC view. This will help employers decide whether or not the intermediaries rules need to be applied. The Status tool can be found here.
The outcome of the tool is of course dependent on the information that is fed into it. The questions arising from the ESI will be based on the 3 factors that have arisen out of long standing employment and tax cases.
These 3 factors are:-
- Control. What control does the engager have over where, when and how the work is done.
- Substitution. Can a substitute be sent in place of the worker.
- Mutuality of Obligation. Are you as the engager obliged to offer work, and is the worker obliged to accept the work.
Answering the questions in additional guidance to be published by HMRC in conjunction with the ESI, will give the engager HMRC’s view of the correct tax treatment
Do you need to act now?
Unreservedly yes. This is a major change to employment status. Get the status wrong and HMRC will seek tax and NIC from the engager, whether the worker has declared the income or not.
For further information or you consider that a status review would benefit you and ensure compliance with the new legislation, please contact Ben Fearn or Paul Chappell.