It is unlikely that any of our readers will not be aware, at least passingly, of the ‘Intermediaries Legislation’ more commonly referred to as IR35 (the name refers to the number of the original press release). Many might actually have clients who are caught by the rules, which came into effect in April 2000. IR35 legislation is designed to determine whether a non-payroll worker is a bona fide contractor or is essentially a direct employee of the company he or she is working with – a ‘disguised employee’. HMRC uses a series of different tests, which include whether the individual could substitute someone else to do the work and how much control the worker has over working practices and timings. If HMRC concluded that an individual was a disguised employee, he or she would then be taxed as such and would also potentially have to pay back taxes too.
The financial consequences of such a ruling can be substantial. In February 2018, HM Revenue & Customs ruled that former BBC presenter Christa Ackroyd – engaged by the BBC via a personal service company – was effectively a full-time employee and she was liable for a tax bill of up to £420,000!
Responsibility for IR35 assessment moves to the employer
The IR35 rules were changed in 2017 to transfer responsibility for assessing whether an individual is a disguised employee from the individual to the ’employing’ organisation but this was only applied to public sector organisations. That principle will be extended to private sector firms from April 2020. This means that, in the event of a successful challenge from HMRC in respect of an individual, the organisation could be liable for retrospective Income tax, NI Contributions and fines. The individual would still have to account for his or her taxes and NI too.
However, it is intended that the extension of the principle will not apply to ‘small businesses’. This term has not yet been defined but the Government has stated that it intends to use ‘similar criteria’ as found in the Companies Act 2006 to define a small business. The Act says that a company will be regarded as small if it has two or more of the following features.
- Turnover of £10.2m or less.
- £5.1m or less on its balance sheet.
- 50 employees or less.
Accordingly, it is likely that the change of rules will not be applied to a lot of small to medium size adviser firms … yet.
Business as usual?
Does this mean that the many firms with self-employed advisers can carry on regardless? For the meantime, yes. The April 2020 IR35 changes explicitly do not apply to self-employed individuals.