Many businesses complete their work using a mix of employees and freelance contractors. There are, however, instances where the line between the two can be blurred as contractors work for a business on a more structured basis, in a situation similar to that of a permanent employee. The new implementation of IR35 legislation looks to remove this grey area in the case of contractors using a Ltd Co to invoice for completed work.
The lowdown on IR35
IR35, also known as intermediaries’ legislation, is a piece of tax legislation that has been conceived to prevent tax avoidance by workers who are not technically employed by those for whom they work. For example, someone might be employed through an intermediary limited company and, if it were not for this intermediary, would be a full-time employee.
IR35 first came into place in 1999 and underwent changes in Phillip Hammond’s Autumn Budget 2017 where public organisations and recruitment agencies had to decide whether a person was ‘outside IR35,’ a contractor, or ‘within IR35,’ an employee. The proposed change is to apply the public sector changes of 2017 to the private sector. According to the latest IR35 Forum minutes from 11 December 2017, these reforms are predicted to hit the private sector in April 2020.
Currently, to determine whether a contractor or interim professional is ‘outside’ or ‘within’ IR35 legislation, there’s a tool: The Government’s CEST toolkit (Check Employment Status for Tax) However, the tool has been problematic as it is something that can be worked to gain the desired result. There are large differences in the results that some experts on tax and employment law struggle to get results from it that are consistent with their understanding.
One of the most fundamental problems with the CEST toolkit is that its understanding of what is meant by employment appears to be different from that of the law. The discrepancies in the toolkit seem to stem from there being a difference in the understanding of employment between the law and HMRC. Where businesses think that they are not employing people, and, legally, they might not be, HMRC thinks that they should be employed. It comes down to how employment is understood.
It is the business’s responsibility to ensure that they have classed all their workers, both employees and contractors, correctly. To do this, they can use the CEST toolkit to ensure they will be compliant with HMRC guidelines. However, companies will not want this responsibility and will render themselves vulnerable by not conforming to IR35.
How to manage
There are many steps that can be taken to ensure that the implementation of the IR35 regulation does not change your interim talent whilst exposing your business to the risk of not complying with tax law including you carrying out tests to see whether workers should be classified as employees or contractors. A specialist recruitment agency such as Cobalt can support you with HMRC guidance and help you get independent advice if needed to ensure compliance as we understand the legislation and can help businesses adapt.
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