IR35 and self-employed advisers

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.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

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Our View

Many firms have advisers that work on a self-employed contract. There is also an increasing trend towards advisers having their own limited company (unregulated) and providing their services to a regulated firm, effectively as a contractor. The potential tax benefits of either of these situations to both the firm and the advisers are pretty obvious and the firm also benefits by avoiding the costs associated with statutory employee rights.

So, while IR35 rules do not apply to the self-employed at this time, the existence of those tax benefits represents a continuing temptation to HMRC and it would be foolhardy to bet against IR35 being applied to smaller firms in future, and perhaps eventually to the self-employed. And it is undoubtedly the case that the very nature of the relationship between the firm and the adviser means that it is unlikely that the adviser would not be considered to be an employee.

Regardless of the tax situation, there is a potential business risk in advisers being on a self-employed or limited company basis that needs to be considered. In a network or appointed representative situation, it is not uncommon for network member / AR firms to hold the misplaced view that they are running their own business and simply paying for compliance services from the network or principal firm. The self-employed/limited company model carries the same cultural risk.

The reality is that the regulated entity is the network firm, the principal firm or the firm using advisers on the self-employed/limited company model and those firms have significant regulatory obligations to ensure that FCA rules and principles are followed. Those obligations can be made more difficult to fulfill where there is not a formal employer / employee relationship.

Action Required By You

  • Firms that will not qualify as ‘small firms’ need to review arrangements with any ‘off-payroll’ individuals and consider whether IR35 will apply;
  • HMRC has a tool that can be used to assist (although this has been subject to some criticism – it is what there is);
  • Any relationships that will be caught by IR35 should be re-negotiated as required;
  • For further information, contact your usual ATEB Consultant or contact ATEB here.

About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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