Changes to taxation affecting contractors working in the private sector for large and medium sized businesses come into force from April 6, writes Alan Rolfe, senior tax manager, HWB.
The UK’s IR35 legislation ensures that contractors pay the same tax and national insurance contributions (NIC) as an equivalent employee. The ‘off payroll’ rules mean that where IR35 applies to a contractor the responsibility for paying related tax and national insurance to HMRC switches from the individual, generally operating as a personal service company (PSC), to the end client.
IR35 legislation was first introduced in 2000 and looks at whether an independent contractor is working as a contractor or are more like a ‘quasi-subcontractor’ or ’not-quite’ employee and should therefore be taxed the same way. Poor compliance resulted in a reform in 2017 which shifted responsibility for determining employment status from the personal service company or intermediary to the end client when working for public sector bodies.
If a contractor has similar responsibilities and working conditions to an employee then they are classed as ‘inside IR35’ and are subject to tax and NIC. However, there are a few key factors in determining IR35 status which should be considered:
This rule determines that a true contractor can be substituted and accepted as a worker if the contractor is unavailable. The working contract should contain a substitution clause whereby they are offering a service of a business rather than that of an individual.
Where a professional service is provided, a contractor will be able to exercise autonomy in the way they undertake a project. Therefore, a contractor would not be supervised, receive staff benefits, or be constrained by start/break/end of work times.
Within an employer and employee relationship there is an obligation to provide and accept work. However, with a contractor this obligation is not there, but questions can come up when contracts are continually renewed or notice needs to be given to terminate a contract.
You can also look at other factors such as whether equipment is provided by the customer or the contractor and whether most risk is with the customer and not the self-employed contractor themselves.
The first step will be to determine if your organisation is classed as a medium or large business. Under current legislation this is determined under criteria found in the Companies Act 2006 where a medium or large business has two or more of the following features:
If IR35 does apply, then a review will need to be undertaken of contractors who are paid ‘off payroll’ (ie by invoice) to determine their correct tax status. A Status Determination Statement will need to be produced confirming the reasons for the decision and be provided to both the contractor and the intermediary. This will need to indicate if payment should be made to the employee as the gross value of the invoice or under deduction. Until this is provided, then the end-client will remain responsible for collecting income tax and NIC.
Any worker who is then identified as a ‘deemed employee’ will need to be added to the organisation’s payroll, with the correct tax and national insurance amounts deducted. However, they will still not be treated in the same way as an employee who will be eligible for any employment benefits such as holiday pay or auto-enrolment pension contributions.