Contractor status Challenged by the new IR35 rules

In the modern age and current economic environment there is increasing reliance on self employed contractors to fulfil business roles.

Contractor status Challenged by the new IR35 rules

In the modern age and current economic
environment there is increasing reliance on self employed contractors to fulfil
business roles.  New changes coming in
April 2020 highlight government steps to shift the tax liability for self
employed contractors  from the contractor
to those that engage their services.

A great number of businesses – including franchise businesses – engage a wide range of people to carry out necessary work for the business.  That range of people can include self-employed contractors.  The use of self-employed contractors allows more freedom for both the business and the contractors but also lower taxes for each party.

From a tax prospective alone, prior Governments have sought – since 2000 – to try to stop tax evasion.  In 2000, the Government introduced the off-payroll rules – IR35 Rules – to tackle disguised employment.

The IR35 Rules are a set of tax rules established to make sure that where a contractor works, like an employee for end user, but provides services through an intermediary, usually a limited company (but this could be a partnership, umbrella company or an individual) they must pay the same tax and National Insurance contributions as if they were an employee. 

Presently, within the private sector, the IR35 tax risk lies with the intermediary. The intermediary is responsible for determining the self-employed contractor’s employment status. To determine status, the contractual documentation between the parties needs to be assessed together with the day-to-day reality of the situation.  Any tax liability however falls with the intermediary.

From April 2020 the Government is planning to introduce changes to IR35 in the private sector as it believes that in 90% of cases of off-payroll rules are not being applied correctly. 

From April 2020, it will be the end user (a business using the self-employed contractor’s services i.e in this context the franchisee) who must review the status of a contractor working through an intermediary. So, if a business engages a contractor directly, it must assess their worker status. The business must be able to show it has carried out due process to establish whether or not the contractor is generally self-employed or is an employee.  To that end, HMRC has provided an on-line assessment tool (CEST) to help businesses determine contractor status and the business must complete a status determination statement. This is a statement for the business which declares whether the contractor would be regarded as an employee of the business for income tax purposes if the contractor’s services were provided directly to the business.

Should a business determine that the contractor falls within the IR35 Rules, the business must ensure that the correct tax status is given to the contractor and make any payments to the contractor via PAYE. 

The forthcoming changes will apply to medium and large private businesses that engage contractors through intermediaries. There is an exemption for small incorporated businesses where 2 of the following criteria can be met:

  1. Less than 50 employees;
  2. Balance sheet total of less than £5.1M; and/or
  3. Turnover of less that £10.2M.

The new changes could also post significant employment law risks to businesses.  For example, a business could now assess a contractor as being employed and make future payments to them via PAYE. However, in reality, the situation of the contractor has not changed and they are still providing the same services to the business as they have been doing for the last 3 years but under a different title.  In that scenario, the contractor could try to assert that they are a worker and bring a back-dated claim for holiday pay (statutory entitlement of 5.6 weeks’ for full time employees).

Franchisors and their networks in particular those with multi unit operators will need to consider how these changes may impact them  and steps necessary to avoid falling foul of the new regulations.

Fiona Boswell
Fiona Boswell