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Impact of IR35 on the franchise sector

Written by Sue Tumelty on Monday, 05 April 2021. Posted in Legal, People

Amidst the news about the Budget and the excitement over the easing of lockdowns, it’s easy to forget that we’ve been in legislative limbo for the past 12 months.

Impact of IR35 on the franchise sector

Amidst the news about the Budget and the excitement over the easing of lockdowns, it’s easy to forget that we’ve been in legislative limbo for the past 12 months.

The coronavirus pandemic saw a delay in the introduction of the controversial roll-out of IR35 rules into the private sector. But a year has come around quickly and, with no announcement about a further postponement by the Chancellor in the early March budget, the new rules were due to come into effect at the start of April.

Many have raised significant concerns over the new draft legislation, ranging from the potential impact on businesses to a lack of lessons learned by the previous public sector roll-out.

As HR advisers for more than 6,000 small and medium-sized businesses around the UK and Ireland, we have concerns about the impact of the new rules, too.

A brief overview of IR35

Self-employed contractors who work through their limited company enjoy tax efficiency and, while they don’t usually get employee benefits like holiday and sick pay, they do have flexibility and control over their work.

The IR35 rules have been designed to tackle the issue of contractors and their clients taking advantage of this tax efficiency by working as if they’re self-employed, when in reality they are actually employees. 

The new IR35 rules place the burden on the business or organisation, to determine whether a contractor carrying out work for them should be treated as an employee for tax purposes.

How it will impact the franchise sector

The rules will only apply to medium and large businesses, classified as satisfying two of the following three criteria: annual turnover of more than £10.2m; balance sheet of over £5.1m; 50 employees or more. 

Franchise organisations may well fall into this larger business category and so face complicated and time-burdensome issues of deciding how they classify those who work for them. This could be a particular issue for smaller businesses with high turnover. 

Where the problems lie

There are many factors to consider, over whether the contractors have freedom over their workload, on their ability to send a substitute, on mutuality of obligation, among others.

The nub of these issues is that case law is unclear – for example it conflicts with HMRC’s own guidance under its CEST (check employment status for tax) too.

There is historic lack of clarity and ambiguity over guidelines, particularly around the ever-developing issue of employment statuses, in tax and employment law.

For businesses, trying to negotiate this minefield in a manner which negates risk of tribunal and also minimises the time and cost devoted to getting things right, will be a major headache. 

Many companies are not risking getting things wrong and are making all contractors employees, which increases their National Insurance bills significantly and makes life less than ideal for the contractors.

How we think these issues can be resolved

We believe that a key step would be to ensure that there is a fundamental review of employment statuses to provide clarity and simplicity.

Employment law currently provides three statuses – employed, self-employed and worker– whereas only the first two of these exist under tax law. This needs straightening out. We would have preferred this to happen before the introduction of IR35 to the private sector and I would contend that this needs to happen as a matter of urgency.

Fortunately, and finally, the wheels are now turning in this regard. Last year the Chartered Institute of Personnel and Development made 11 key recommendations in a report, produced by the Institute of Employment Studies, into issue of employment statuses. Abolishing worker status altogether, as part of a strategy to clarify matters and align tax and employment laws, was top of the priority list.

As ever, the priority should not be a silo view of what is best for the Treasury, but a look at the wider industry, the potential detrimental impact and cost of claims on all businesses.

About the Author

Sue Tumelty

Sue Tumelty

Sue Tumelty is Founder and Executive Director of The HR Dept, a UK-wide franchise business which provides outsourced HR advice and support to more than 6,500 SMEs through a network of licensees. She is a Fellow of the Chartered Institute of Personnel and Development.

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