‘IR35’ has become a term that many organisations are very nervous about, but what exactly does it mean and does it affect you?
IR35 is a tax law that stops an individual from avoiding employment tax by treating themselves as self-employed, when they are actually working as an employee for an organisation. It addresses situations where an individual is engaged through an intermediary (typically by setting up their own limited company) and therefore avoids having to pay PAYE tax and National Insurance contributions.
IR35 has been in place since 1999. However, since April 2017, public sector employers have been responsible for establishing if the contractors that are working for them are self-employed or employees (for tax purposes). Prior to this, if there was an incorrect categorisation, the individual was responsible for the error and therefore responsible for any unpaid tax or National Insurance contributions. Since April 2017, in the public sector, employers have been responsible and therefore many of them are taking a risk averse approach and applying tax and National Insurance rules to those who might previously have categorised themselves as contractors.
It is planned to roll out the same implementation of IR35 to the private sector at some stage, but it is not known exactly when (i.e. the private sector employer will be responsible for determining employment status rather than the individual, and responsible for any unpaid tax / National Insurance contributions). There has certainly been a lot of criticism of the way that IR35 has operated in the public sector with concerns that genuine contractors are being taxed and subject to National Insurance contributions in the same way as employees, without any of the benefits of being an employee. It is possible that there will be a pause in implementing IR35 in the private sector whilst some of these concerns are addressed. Alternatively, it could be that we see IR35 introduced as early as April 2019. Whatever the timing, it is certainly an issue that you need to be thinking about.
So, what questions need to be asked to determine whether someone is an employee or is not?
There are three relevant questions that you should consider. They are:
1. What amount of control do you have over the individual, what they do and how they do it?
Generally, employees are told when and how to do their work, whereas the genuinely self-employed are likely to have more autonomy as long as they complete the work.
2. Is the individual required to do the work personally, or can the individual send a substitute to do the work?
3. Is the employer obliged to offer work and is the individual obliged to do any work that is offered?
If you have an individual who has to do work personally, who is obliged to do work and you are obliged to provide a certain amount of work, and you have control over the individual, it is likely that they will be treated as an employee for IR35 purposes.
Please be aware that IR35 deals with whether someone is employed for tax purposes. Their employment status for the purposes of employment law may be different. For example, there is a legal definition of ‘worker’, but this does not exist for tax purposes. Workers may be employees for the purposes of tax (and therefore subject to PAYE tax) or they may be self-employed.
Of course, there is a considerable amount of subjectivity in answering these questions. For example, no-one would work in your organisation without you having some control over what they do. So, how is control really defined? To answer this, we need to look at case law.
There have been two recent cases relating to an IR35 ruling. In MDCM Ltd v Revenue and Customs (2018) Daniels had set up MDCM Ltd to provide construction and management services. A company called Solutions Recruitment Ltd placed him with a construction company called Structure Tone Ltd as a night shift manager. He worked there full time for ten months.
HM Revenue and Customs (HMRC) argued that Daniels would have been directly employed by Structure Tone Ltd if he had not formed the company MDCM Ltd, because he was actually working as an employee rather than providing services through his company. HMRC argued, therefore, that he should be taxed as an employee. In determining this, HMRC focused primarily on the issue of control. Structure Tone Ltd set the work and determined what would be done and when.
Daniels argued that all construction sites are run this way, and therefore this was not particularly relevant. He also noted that he was able to order his own work and was only visited once a week by a supervisor. He was required to pay for his own travel, hotel and other expenses and had no entitlement to severance pay. He was paid a flat rate per day and was not entitled to any employee benefits.
Although it was agreed that there was a requirement on Structure Tone Ltd to provide work, and on Daniels to do the work, there was a clause in the contract which allowed Daniels to send a substitute worker. In reality, this had never happened, and it was difficult to see how this could have worked.
HMRC argued Daniels was an employee, but the Tribunal disagreed. It concluded that the level of control was no more than a client would have over a contractor and therefore, he was not an employee for tax purposes.
This case contrasts with that of Christa Ackroyd Media (CAM) Ltd v Revenue and Customs (2018), which was reported earlier this year, where a former BBC Presenter was ordered to pay more than £400,000 in unpaid tax and National Insurance contributions when it was concluded that she had been an employee, even though she had operated as an independent contractor working through her own company. Ackroyd presented a daily news and current affairs programme, and the Tribunal found that it was nonsense to conclude that she was not an employee. As the events in this situation relate to payments prior to April 2017, Ackroyd is responsible for paying the unpaid amounts, rather than the BBC.
We will, of course, keep you informed of any developments in applying IR35 in the private sector. However, it would be a good idea to start the process of reviewing the status of any contractors that you have working for you. Apply the three questions set out above, and if they leave you confused about the employment status of anyone working for you, contact us to talk through the situation.
If you have any questions please get in touch with the employment team.
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