IR35 reforms are predominantly for the payroll and tax pros to be thinking about, but there's also a lot for employers and business owners to be thinking about.
Real talk now - I am not qualified in payroll and I am not a tax expert either. So if you have queries relating to these things - go speak to your relevant expert! This blog is just going to focus on the employment bit of IR35.
What is IR35?
IR35 is a tax reform bill that HMRC are bringing out to tackle tax evasion using intermediaries. So this is when a person provides a personal service to a client but does it through a limited company (intermediary) to avoid the client having to pay income tax & NI for that person. The changes were due to come in April 2020 but you know...COVID and all that. So it all got deferred to 6 April 2021.
Personal Service what?
I know, way to confuse everyone. A personal service relates to when you as an individual are personally providing a service to the client and the client has control over how, when and where you work and what you are paid.
It does NOT mean, an individual providing a service through a company.
For example, when my clients ring me up for advice on a disciplinary case, that's me providing a service. But that service could also be provided by my (imaginary) HR Assistant or another (equally imaginary) qualified employee of my business. My clients don't necessarily mind who they speak to, as long as they get support.
But, if a client asked me to work in their office and be their HR Director for 6 months, that would be me providing a personal service. Because the client wants me, my HR Assistant couldn't go and do that job for my client. The client would decide when I work (their office hours) and how I work etc. I would effectively be almost employed. That's when the IR35 rules kick in.
Well, if you have a contractor providing such a personal service, under the new rules, they will basically be a deemed employee for tax purposes and should therefore be on your payroll, so there will be some things you will need to do differently.
Let's say I agree to be HR Director for my client for 6 months.
I would be a Deemed Employee under the rules which means my client would have to put me on their payroll. My "salary" would be my fee, and my client would have to pay tax & NI contributions for me. I would still invoice my client, but the amount would be 32% less for the tax & NI contributions. Then at the end of the contract, my client would take me off their payroll and send me a P45.
So a deemed employee is an employee?
This is where it gets interesting. A deemed employee is considered an employee for tax purposes only. Being a deemed employee does not entitle the individual to any employment rights under employment law. That means they are not entitled to a payslip, contract of employment, benefits, pension, SSP, the lot.
Defining employment status for the purposes of employment law is a whole other ball game with a different set of tests for status.
However, the recent ruling on the Uber case highlights the importance of having your employment statuses v. clear. If you think that you have a deemed employee on your hands, I would strongly recommend you review the nature of your working relationship and your contract of engagement to make sure they accurately reflect one another.
Right, so how do I know if I've got a deemed employee, taxwise?
HMRC have been kind enough to set up a Check Employment Status for Tax (CEST) tool. You can access this via the interweb to help you decide status.
You can also test things like supervision, direction and control. You don't supervise a plumber that's fixing your boiler, but you would supervise your employee. You don't tell your car mechanic how to do their job, but you do give such direction to an employee. You don't have much control over a contractor, but you do have contractual control over an employee.
If it looks and feels like they're basically an employee, they probably are - for tax purposes!
We'll cover employment status in the HR theatre another day!