IR 35 – Six months on, are you operating correctly?
The Institute of Chartered Accountants in England and Wales (ICAEW) have warned that HMRC are targeting businesses operating in the oil and gas, banking and finance sectors regarding the application of the ‘IR35’ legislation which was introduced in April 2021. There could in the future be further changes to this legislation.
In undertaking their checks HMRC have issued nudge letters to organisations operating within these sectors to confirm that they are correctly applying the rules where applicable.
The letter requests further information to understand the organisation’s process for hiring contractors and how they are determined to be within or outside the scope of the rules.
A challenge for many larger organisations is that their contractors might typically invoice for their work which is handled by purchase ledger teams and there is a risk that status checking could therefore be overlooked by HR and/or payroll teams.
Where we were
These rules were originally introduced in April 2017 applying to the public sector, and since April 2021, they now also apply to large and medium sized private businesses. This means that the responsibility is now in the hands of the ‘engager’, the entity engaging ‘workers’, through their ‘personal service companies’ or ‘intermediaries’. An entity will be considered medium to large if it satisfies two of the three indicators below:
- An annual turnover of more than £10.2m
- A balance sheet total of more than £5.1m, or
- More than 50 employees.
If the above indicators are met, it will be the responsibility of the ‘engager’ to determine their worker’s employment status. If it is determined the ‘workers’ engaged by the client fall within the parameters of IR35, their fees will be subject to income tax and National Insurance contributions.
How to ensure IR35 compliance?
There are several steps in which an entity can ensure they are meeting their obligations as an employer when the changes to IR35 were enforced in April 2021:
- Identify those individuals within your employment data base that are currently providing their services through a ‘personal service company’.
- Self-determination of the employment status of the individuals through review of contracts and apply the indicators of IR35 (see below).
- Advise the risks surround the engagement with the workers and investigate potential adjustments to help mitigate these risks.
- Establish an internal function that will review engagements and make determinations on employment status’ in the future.
Whilst there are several indicators that aid in the determination of employment status, there are three key indicators that are likely to have a significant influence on the overall outcome:
|Mutuality of Obligation||If the engager is obliged to provide work to an individual and the individual is obliged to undertake that work, this would be an indication that this individual is employed by the client.||If the engager is under no obligation to provide work to the individual, and the individual can choose whether they accept or don’t accept the work, this would indicate the individual is self-employed.|
|Control||Does the engager have the ability to dictate what, how, when and where the individual will undertake their employment tasks? If yes, this would indicate the individual is employed.||Does the individual control what, how, when and where they complete their work? If yes, this would indicate they are self-employed.|
|Personal Service||Is the individual the only person who can provide the services required of them? This would indicate that an individual is employed.||Does the individual have the ability to sub-contract their work to others? This would indicate that the individual is self-employed.|
Other indicators, whilst not as influential as the above, to consider are:
- Provision of own equipment
- Financial Risk
- Opportunity to profit
- Degree of integration into the organisation
- Right to terminate contract
- The number of paymasters
HMRC: Check Employment Status For Tax (CEST)
HMRC have developed a platform in which engagers and workers can check their employment status. Whilst there are some obvious teething issues with the platform, HMRC have stated that when answered truthfully, the platform will be relied upon.
Please click here for the employment status check platform.
We do note that as the platform is in its infancy, it would not be wise to rely on the results it produces. Due to the inconsistencies and the unreliability that currently surrounds the platform, we recommend that you consult case law or a tax specialist before making a final determination on an employment status. HMRC have indicated they are in the process of updating the platform which should in turn produce more reliable results in the future.
Should you like to speak with us regarding your responsibilities regarding the new legislation please do not hesitate to contact our head of employment taxes; Tom Boniface at firstname.lastname@example.org.
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