In April 2020 HMRC is bringing in new rules for organisations which hire contractors. Up until now, IR35 legislation has looked after the taxation relating to contractors, but IR35 is soon set to be replaced with a new Off-Payroll Tax. The new Off-Payroll Tax legislation will be used to identify ‘deemed employment’ status. So if you run a franchise and hire freelance workers it’s time to take note!
To help the change over be implemented as smoothly as possible, the Government is currently undertaking a review of the new legislation. This may result in some minor changes to proposals. The review will be complete and we will know the outcome in mid-February, however, if they go-ahead largely as planned, large and medium sized organisations hiring contractors or freelancers will need to take action.
IR35 was first introduced in April 2000 and was intended to ensure that individuals who provide their personal services through Ltd Companies, but in reality are ‘disguised employees’ are taxed accordingly. This usually occurs where there might be a freelancer or contractor who has set up as a limited company but only provides services to one client organisation, so they are acting more like an employee. IR35 affects these staff as it means they needed to pay tax and National Insurance contributions just as if they were employed.
From April 2020, the new Off-Payroll Tax will replace IR35 for medium and large companies. To qualify as a small company, two of the following three conditions need to apply;
- turnover of £10.2m or less;
- £5.1m or less on its balance sheet; or
- 50 employees or less.
Historically it has been the ‘worker’ that has needed to determine whether IR35 applies, and in the event of an HMRC enquiry it is the ‘personal service company’ that they would pursue for the underpaid tax/NI. A key point of this change is that the responsibility for assessing contractual engagements will now shift from the contractor to the employer or client.
Genuinely self-employed contractors and their clients should have nothing to fear but contracts and the nature of their tasks need to reflect the correct working relationship. For example, a genuine contractor can turn down work, and won’t have paid holidays unlike an employee.
So if you employ contractors it will be your responsibility to do a CEST test – a check for employment status for tax for each contractor you employ. A blanket approach is unacceptable, so each individual contractor will need to be reviewed. As the employer, if the contractor is deemed as an employee, you will now be liable for some tax liabilities including Employers National Insurance at 13.8% so it is important to clarify the situation correctly.
There are actions that can be taken, contracts can be reviewed and clarified or the contractors can work through umbrella organisations. To comply with the new legislation, if you hire contractors or freelancers it will become your responsibility to review each relationship and act accordingly.
The new rules will be the biggest change to the IR35 regulation since it was introduced two decades ago. At d&t we are always happy to provide advice about tax for our clients so if you are a franchisor worried about these new regulations then please contact us and we can help you clarify contracts and ensure your franchise remains compliant.
