If your company engages contractors to carry out work, you will be familiar with the sometimes-dreaded terms IR35 or Off-Payroll Working Rules. The roll-out for the private sector was postponed for another year in April 2020 but is now firmly in place. This month, CRM has some tips for engagers to make sure they’re aware of the changes. You can also read our guide for contractors here.
Firstly, the good news. HMRC has reported that it will not expect engagers that accidentally fall foul of the IR35 rules to pay a fine in the first year. This includes cases where the wrong tax determination is made unless there is evidence of deliberate non-compliance. Engagers are encouraged to correct errors before HMRC intervention.
Status determination comes into play because it was previously the responsibility of the contractor to assess whether they fall within the IR35 rules, but from April 2021, the onus falls on the engager to determine the status of their contractors. Engagers are required to issue a Status Determination Statement to contractors to explain their status (whether inside or outside the IR35 rules). It’s very important to back up your decision with evidence and file the relevant documents.
Small business exemption
If your company is deemed to be ‘small’, contractors are still allowed to determine their own IR35 status. A small business is defined using the Companies Act definition as having:
- an annual turnover of less than £10.2 million
- a balance sheet of less than £5.1 million
- 50 employees or fewer
You must meet at least two of the above criteria in order to qualify as a small company.
What should employers do?
For medium and large businesses, after determining the status of contractors, employers should review the relationships with consultants and accurately reflect their status. Some may need to be converted to employees of the business, perhaps on a zero-hours contract or casual worker agreement that avoids continuity of service.
HMRC encourages employers and contractors to check their IR35 status using an online tool called CEST (Check Employment Status for Tax). However, this tool has been criticised by industry bodies representing the self-employed because it doesn’t factor in one of the important features of IR35 – Mutuality of Obligation (MOO). Making sure that a contractor doesn’t have the same obligations as an employee has been a key point of argument in IR35 tribunals so don’t rely on CEST too heavily.
If your business hires contractors regularly or ad hoc, make sure you’re fully up to speed on the IR35 rules and review your working relationships. A standard contract is unlikely to be satisfactory as HMRC will expect specific agreements with details of the work carried out for each project.
CRM can recommend an excellent Contract Review Service to assist with this task. Getting a professional contract review enables you to pre-empt any HMRC investigation and have peace of mind that you have a strong case.
Off-payroll working rules offer yet another significant challenge to businesses and if you’re finding IR35 way too taxing, contact the experts at CRM for help on 01865 379272.