What is ‘Within IR35 Contractors’ and the changes in April 2020?
The IR35 legislation is aimed at ensuring contractors pay the same tax and National Insurance as an employee in an equivalent position. New rules come in from April 2020 that will affect private companies classed as medium sized or larger. The new rules will not be applied retrospectively.
The IR35 legislation places responsibility on the employer, not the contractor, for the reporting, collection and payment of tax and National Insurance. The employer is also responsible for determining if the contractor falls within the IR35 rules.
Who does it apply to?
Small employers are exempt. Small employers should meet two of the following conditions:
- Have less than 50 employees
- A turnover of less than £10.2million
- A balance sheet total of less than £5.1million
There are additional rules where companies fall under the group rules, and simplified rules for certain other companies with a turnover of greater than £10.2million.
For medium and large enterprises the new rules will be applied. The employer not the contractor decides if the work falls within IR35 rules, and is then responsible for reporting and paying the tax and National Insurance.
What contractors fall within IR35?
Employers must take reasonable care when determining the status of a worker, and there is a tool available from HMRC to assist with the test – CEST (Check Employment Status for Tax). Employers should record the results of the CEST assessment as HMRC have said they will not hold records.
The CEST assessment is based upon a true agreement between parties, so if a contract or agreement is considered as contrived and not reflecting the true nature of work HMRC will disregard the CEST result.
Once a worker has been determined to be within IR35 they need to be reported via RTI. This will mean through a payroll, but there is an important distinction between a PAYE employee and a contractor within IR35.
What do we need to do about contractors who fall within IR35?
How employers deal with IR35 will depend on individual circumstances. For many a separate payroll with separate PAYE references will be simplest, but if there are only one or two temporary workers, including them within the normal payroll may be more straightforward. Intermediary companies will also have to deal with IR35.
The RTI requirement is a reporting issue, as it is deemed employment that is reported and used for the tax and NI calculation. This is unlikely to be the same as the invoiced amount from the contractor. HMRC has guidance on how to calculate deemed earnings, but these are also changing in April. Again it is important to understand the distinction between a contractor within IR35 and an employee, although both could potentially be reported through the same payroll.
There are some other differences between the contractor within IR35 and an employee on Pay as You Earn. There are no student loan payments, holiday pay, statutory payments or auto-enrolment duties for instance. Employment Allowance cannot be offset against NI from deemed employment, although Apprenticeship Levy is counted. For these reasons a separate payroll to the PAYE payroll may be much easier to administer.
Further details will follow, but at the moment there is still a lot of uncertainty within companies of how exactly they will remain compliant with the new regulations. There is further guidance available from here.