A highly controversial change in the IR35 regulation that’s been rolled out in April 2021 is about to come into full power. This article is an extensive guide for recruitment agencies aimed at helping to ensure full compliance with the bill.
The original IR35 bill has first been released in 2000, seeking to put an end to tax avoidance from ‘disguised’ employees. However, it was poorly implemented and has undergone many changes since. New legislation under the name ‘Off-Payroll Reforms’ was then introduced in 2017, aimed at the public sector specifically. Although it’s a separate bill, today it is commonly referred to as IR35.
It was then decided to extend it to the private sector. Due to the global pandemic, however, the expansion was delayed until April 2021. While the new rules were set in place then, the HMRC agreed to give the private sector a year to adjust its processes to the new regulations. Now that the year is almost up, we are writing this article to provide guidance to help you ensure your organisation is fully compliant.
IR35 from April 2022
Starting April 2022, the rules introduced in the IR35 bill come into full power. During the previous ‘rehearsal’ year the rules were laxer and accidental IR35 violations wouldn’t lead to penalties. This will no longer be the case from April 2022. As we are nearing the date, it is important to ensure you have the correct IR35 processes in place.
Despite having had a year to adjust, many businesses still find the bill requirements unclear, potentially putting themselves at risk. In this blog article, we will be addressing some of the most important parts of the bill that are crucial for you to act upon.
Frequently Asked IR35 Questions
Let’s start with the questions. While the changes in the legislation have raised many, we’ve identified the following three to be the most confusing.
What's the Difference Between Inside IR35 and Outside IR35?
The inside IR35 worker is an off-payroll employee, whereas the outside IR35 is a genuine contractor. The difference between them is determined by HMRC, based on how they work and what is their relationship with the employer.
For example, a contractor that works 40 or more hours a week for just one client, is seen as an off-payroll (inside IR35) employee. The recruitment agency is billed by the self-employed worker’s company, also known as a ‘personal service company’ (PSC), and in turn bills the client as if the agency were providing the work to the client. However, due to the length of time, the contractor may work for the client and their lack of other clients, the contractor is effectively working as if he/she is an employee of the client.
An outside IR35 worker should be employed by an intermediary company and provide work to them rather than the client directly. For example, a digital agency that specialises in website creation has a project that demands graphic design; but they don’t have a graphic designer. Since they know it’s a one-off, there is no need for them to create a position in the company. Instead, they will be hiring a contractor. The contractor will be creating visuals for the agency’s client but will invoice and receive the payment from the agency.
Who Determines IR35 Status?
It strongly depends on the situation and the sector. In the public sector, the hiring party is meant to determine the IR35 status. If the contractor falls into the brackets of the legislation, the company responsible for paying will also be responsible for deducting tax, NICs and reporting to HMRC.
In the private sector, the client organisations classed as ‘medium’ or ‘large’ determine the employment status of contractors and must inform them of the decision. The decision can be disputed by the contractor. For small businesses, the duty to determine the IR35 status lies on the contractor.
What Are the Penalties?
After April 2022, whether accidental or not, non-compliance with IR35 will result in severe consequences for both, the client and the contractor.
In a scenario of carelessness and accidental inaccuracy, the contractors will be liable for 30% of the unpaid tax. If it’s proven to be a conscious act of operating as self-employed despite knowing they fall under the IR35, the percentage will grow to 70%.
During the first year of the legislation changes, the employing company would receive no penalty over accidental violations - it’s yet unclear what the consequences of unintentional non-compliance will be in 2022. Deliberate violations, on the other hand, will result in a tribunal by HMRC and, potentially, having to pay the entire sum of the NICs avoided.
Preparing Your Agency for IR35 Compliance
Since accidental violations will soon become punishable by HMRC, it’s crucial to ensure your business is compliant with all the regulations. Below, we walk through some extra measures to ensure your agency’s smooth transition.
Recognising the Exemptions
Just like with every law, there are exceptions and it’s on you to recognise them. If your client falls under the category of a small business, they are exempt from the IR35 bill. The following are requirements for a business to be recognised as small:
- annual turnover not exceeding £10.2m
- balance sheet total not more than £5.1m
- an average of no more than 50 employees for the company’s financial year.
Keep in mind that as the business grows, IR35 may become applicable.
Another factor excluding the client from IR35 is whether the company is based overseas. In this scenario, however, you should ensure compliance with the client’s country regulations with regard to contracted workers.
Notifying the Clients and the Contractors
You have probably taken steps to inform your clients and contractors about changes in the off-payroll regulations prior to them being rolled out in April 2021. However, you have most likely acquired new contacts in a year, and some of them may not be informed about the bill. The older contacts could also do with a refresh, as well as reassurance to alleviate their possible concerns.
It’s advised you tailor two separate emails explaining the changes in the policy, one which explains what it entails for each party, and another on how will it affect the way your agency operates. This way you will have everyone up to date and aware of what should be expected from your side, and their obligations.
Focusing on the Positives
The controversy of the IR35 bill highlights the negatives, especially for the contractors now being exposed to bigger taxes if they’re determined to be inside IR35. This may lead them to consider leaving the clients and agencies or asking for more pay to offset the new taxes. Thus your talent retention strategy should incorporate pointing out the upside of the legislation.
Some agencies and contractors have accepted that the workers are effectively employees, and either moved to PAYE employment or deducted the off-payroll taxes from their PSC invoices. Others have taken the route of offering a more consultative model of business, managing projects and providing work in the form of deliverables, rather than simply providing a worker for an amount of time.
If you choose to work with this model, it is important to ensure that you maintain a paper trail to show that provides enough evidence that you are providing a service in which you are in control of the day-to-day activities of the worker, focusing on delivering work with given specifications. The client cannot be in control of the worker’s holidays for example.
Top 10 IR35 Factors
Despite the heavy financial and reputational consequences violation of IR35 carries for both parties, it is very easy to get confused about whether the contractor is inside IR35 or outside. If you found yourself struggling to determine their status, here are the top 10 factors that make them a ‘disguised’ employee.
- Background. Was the contracted job previously required by the client and/or ran in-house? If yes, the contractor might be perceived as filling a previously on-payroll role.?
- Previous investigations. If the client has been previously caught for an IR35 violation, they are viewed with more suspicion and scrutiny.
- Contracts. Unless the contract has been either written or checked by a professional, they are highly susceptible to breaching the IR35.
- Control. There are four things the contractors should be told by the client: the what, the how, the where and the when. More detailed instructions such as the start/finish of a workday, lunch breaks, specific days when the tasks should be executed etc. are serious red flags.
- Substitution. The contractor must be replaceable and possible to substitute. If they are not, this may hint at them being a ‘disguised’ employee.
- Mutuality of Obligation (MOO). The client has an obligation to pay the contractor for a job, whereas the contractor has an expectation to have the job given. Very often this obligation is exclusive. Genuine contractors should not have MOO.
- Invoicing structure. Weekly or monthly payments to contractors resemble salary. Freelancers are normally invoicing clients upon specific tasks completed or by the end of the month.
- Equipment. A genuine contractor is expected to use their own equipment or else it may start looking like an employee-employer relationship, in which the employer provides tools to work with. There are exceptions for legitimate reasons such as safety or security, but even that is treading on thin ice.
- Integration into the business. Although there are situations in which companies have long-term relationships with the contractors, they should not be seen/treated like company employees. E.g. their name shouldn’t be added to the team section of the website, etc.
- Intentions. Not clearly and directly stating that the nature of your relationship is strictly client-contractor can also land you in the hot waters.
Key Takeaway
The year given for the private sector to adjust to the IR35 changes is almost up. This means that starting April 2022, both clients and contractors will start getting penalised for noncompliance with the tax law. Despite the severity of punishments and ongoing controversy in regards to the bill, there are still many grey areas that cause uncertainty.
Unfortunately, being genuinely confused will no longer be accepted as an excuse. With a little time that’s left, you should focus on re-assessing your agency’s readiness to comply and bringing both clients and contractors up to speed with the changes. If all is done correctly, the transition won’t even be felt.
Timesheet Portal can help you with IR35. We have the tools required to help you register and check your contractor’s IR35 status and add in the necessary off-payroll deductions for in-IR35 contractor invoices. You can also track and charge work in the form of deliverables. Our project edition provides all the tools for tracking project time, allocating resources and managing multiple tasks within a project. To find out more, get in touch.
Disclaimer: The information in this article is provided to the best of our knowledge and serves as a general guide to the IR35 legislation. You should always make your own enquiries with HMRC or a qualified legal / financial expert in this area before acting on any of our advice.
