What IR35 Means for Small and Large Businesses

What is IR35?

IR35 was introduced in 1999, to address the issue of ‘disguised employment’ of contractors who avoided paying income tax and NI contributions by offering their work through an intermediary.

Many companies provided work to contractors in a bid to save money by avoiding paying NICs (National Insurance Contributions), yet still providing the freelancers the same benefits their regular employees received.

The new IR35 legislation is hopeful in preventing workers from being exploited in this manner by their clients. For a comprehensive explanation about IR35, contact Umbrella payroll from People Group Services for expert advice and guidance.

There are two stances for working individuals to determine what tax they should be paying. These are:

  • Inside IR35 – Due to the nature of an individual’s working relationship with a company, they are considered in respect of IR35 legislation to be an employee and should be treated, and taxed accordingly.
  • Outside IR35 – With regards to IR35’s rules, an individual is operating as an independent contractor supplying a B2B service to a company. Therefore, the company shall not pay tax on their behalf, and the responsibility lies with the independent service provider to declare their income and pay tax.

How Will This Affect Businesses?

Since 1999, various issues have arisen, with workers having to determine their status. In light of this, the government, over recent years, has drafted new legislation for IR35. The responsibility of deciding a worker’s IR35 position will no longer fall on the self-employed contractor, but their client.

By April 2020, a large portion of the private sector will be expected to undertake this task with immediate effect.

What Businesses Need To Do?

The new legislation explains that companies need to be vigilant when distinguishing employees and contractors. Should they not do the necessary assessments of working conditions, and merely group all workers under a particular IR status; the business may suffer various consequences, such as HMRC penalties.

Take Action Now

Companies are expected to have adopted the new changes that are approaching in April 2020. This is why it’s essential, if you haven’t already, to begin assessing your contractors’ IR35 positions.

Here are a few suggestions to decipher the IR35 status of each employee;

  • Distinguish non-permanent workers
  • Adopt methods and a plan of action to assess your employees before April 2020. For instance, you may want to use the ‘Check employment status’ test provided by HMRC.
  • Monitor your solutions for determining each employee’s IR35 status on an ongoing basis and keep ahead of any new changes in legislation.

Preparation is vital for businesses small and large to enforce the new tax legislation in April 2020. Ignoring the reform could prompt HMRC to investigate your business workers’ position with regards to IR35. For additional advice, refer to gov.uk, and your payroll provider for more information.

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