Employment and self-employment changes for IR35
Here we look at the changes to employment and self-employment under IR35
One of the most talked about changes in recent years is the new IR35 off-payroll rules, applying to those working via a personal service company (PSC) for a public sector body from 6 April 2017. These rules are scheduled to be rolled out into the private sector from 6 April 2021 for medium and large companies, under current plans, small sized businesses are currently exempt. The implication of the new legislation is that if you are deemed an employee, the lead procurer of the contractor will treat your services as employed income and subject it to tax and NI as though earned through the payroll. You will not have other working rights and benefits normally associated with employment.
HMRC look at each case on an individual basis and therefore applying a simple checklist in drawing up any contracts may not be sufficient to satisfy businesses caught by the new rules.
The key difference is that an employee is engaged under a contract of service, whilst an independent contractor is engaged under a contract for services.
Being an independent contractor trading via a personal service company is more tax efficient for an individual as their PSC will incur Corporation Tax at 19% and they pay income tax on dividends at 7.5%/32.5%. Whereas an employee pays tax at 20%/40% and employee’s NI at 12%/2%, not to mention the contractor company paying employer’s NI at 13.8%.
Key indicators showing whether an individual working via a PSC would be deemed employed or an independent contractor
| Factor | Independent Contractor | Employee |
|---|---|---|
| Personal service | Will provide own services, but may also sub-contract work to others, or bring in outside assistance. | Only provides his personal services. |
| Mutuality of obligation | Is free to accepts or turn down work if he desires. The engager is under no obligation to offer any work, or further work. | The employer is obliged to offer work, and the employee is obliged to do as the employer requests. |
| Right of control | Likely to be in control of most aspects of the work done. | An employer may control “what”, “how”, “where” and “when” work is done. However, a highly skilled employee may also exercise “what” and “how” also as the employment demands. |
| Right of substitution | May sub-contract work, or bring in assistance. Depends on nature of work; an individual may be engaged because of their personal reputation or skill and so no substitute will be acceptable. | It is rare for an employee to have the right to appoint a substitute. |
| Provision of own equipment | Will normally supply all small tools and bring in or hire in plant, or own the technology required to perform the contract. | May sometimes supply own small tools or equipment: employer will provide all plant and machinery. |
| Mutual intention | The intention of the parties should be stated in written contract. This may not be persuasive if in reality the parties behave differently and should be given minimal weight. | If the parties intend the relationship to be one of employment it is difficult for the courts to say otherwise. In most cases the parties will have agreed written terms of employment and the employee will have enforceable rights under employment law. |
| Personal factors | May be engaged because of skills, reputation etc. | Personal factors may be the reason for appointment. |
| Financial risk/ability to profit | Will quote on a job-by-job basis. Is able to make more profit by more efficient working, or may incur loss if overruns on time, or if required to rectify defects in own time. | Paid whatever work is done,benefits from the National Living / Minimum Wage and statutory holiday entitlement. An employee will bear little risk unless exceptionally work directly relates to a bonus or commission scheme. Or, if poor work affects appraisal for promotion or other benefits. |
| Opportunity to profit | Can profit if work is performed efficiently, or from re-charging and making a profit on materials. | May only profit under a bonus or incentive scheme. However, may benefit from tips, or payments from third parties. |
| Part and parcel of the organisation | May become “a fixture” in that their work brings them to the company regularly, but acquires no additional responsibilities or privileges as a result. | Is capable of being promoted, or manages other staff. Part of works pension, or SAYE scheme. |
| Employee type benefits | Unlikely to be entitled to any type of benefits. May be invited to functions with other external suppliers. | Part of pension scheme, enjoy canteen or sports club facilities, car parking, attends staff functions. |
| Right to terminate contract | If other party is in breach. | Normally give notice under specified contract term |
The new rules
The new rules from 6 April 2021 will only apply to medium and large private companies, public sector businesses must already apply them. The contractor will need to review each independent contractor individually, and issue them with a status certificate & declaration confirming they have undertaken a status test. Contracting companies must work on a case-by-case basis and cannot issue a blank determination on a number of individuals.
Small companies (turnover under £10m, gross assets under £5.1m, under 50 employees) continue to use the old rules where the onus for determining employment status remains on the independent contractor and any incorrect determination by then will be policed by HMRC using IR35 legislation.
HMRC employment status too
HMRC have developed an online tool to help contractors determine the employment status of their workers at the following address:
https://www.gov.uk/guidance/check-employment-status-for-tax
This is a very useful resource as their guidance for this tool states the following:
“In most cases, CEST will provide you with a result. HMRC will stand by the result provided the information is accurate and it is used in accordance with our guidance.”
However, they also state:
“HMRC will not stand by results achieved through contrived arrangements that have been deliberately created or designed to get a particular outcome. We would see this as deliberate non-compliance, and you risk financial penalties.”
ENGLAND & COMPANY
CHARTERED CERTIFIED ACCOUNTANTS
7 & 8 Church Street
Wimborne, Dorset BH21 1JH
T: 01202 880 384
Useful links
Company info
Company Registration Number: 4521252
Registered in England and Wales VAT: 798123494
England & Company is a trading name of Kynance Ltd, a company registered in England & Wales No. 4521252. Registered Office:- 7 & 8 Church Street, Wimborne, Dorset, BH21 1JH