You’ve got self-employed, apprentices, interns, freelancers, contractors, temps, employees… While there are many crossovers and similarities between these, there are key differences when it comes to the employment rights and benefits each type of worker is entitled to. With IR35 on the horizon it’s become a hot topic!
You may have heard a lot about something called the gig economy. It’s a labour market characterised by short-term contracts as opposed to permanent jobs. Transport giant Uber has been in the spotlight recently over controversy regarding its drivers’ employment status and workers’ rights.
Whether someone is classed as an employee or a contractor has a huge impact on how they pay tax and national insurance. It also determines their eligibility for certain benefits such as pensions, paid holidays or statutory sick pay.
If you want to stay on the right side of HMRC, it’s important that your business knows the difference. IR35 rules are to be applied to the private sector from April 2020.
What is IR35?
IR35 is a set of rules initially put into place in the public sector in the year 2000 to address the issue of individuals avoiding tax by working through intermediary Personal Service Companies or their own Limited Companies. Some firms were also playing the system by classing individuals as contractors just to avoid having to pay out for employee benefits. A similar bill was recently passed in California and estimates suggest costs for companies like Uber will increase by around 30% if they treat their workers as employees rather than contractors, so it’s a pretty big deal.
From the 6th of April 2020 these rules will be rolled out to medium and large private sector businesses.
The rules place the responsibility on the end client or agency to determine whether the individual carrying out the work should be classed as an employee or a contractor. At the moment the individual makes that distinction themselves.
Individuals classed as ‘outside’ IR35 are considered contractors and are therefore responsible for paying their own tax directly to HMRC. Those who fall ‘inside’ IR35 are classed as traditional employees and the end client will handle tax and NI contributions for them.
Should my contractors be classed as employees?
There are 3 main areas to consider when deciding an individual’s IR35 status:
- Control – the degree of control you have over how the individual carries out the work.
- Mutuality of Obligation – the obligation to offer or accept work and work a notice period.
- Substitution – whether or not an individual can send someone else to complete the work in their place.
There’s only a few months to go before this legislation change. You should start preparing now if you haven’t already.
- Reviewing existing contracts and putting a plan in place for any work that will extend beyond April 2020.
- Calculating how this may effect your business costs and making changes accordingly to cope with this.
- Communicating the changes to your current workers and planning to have a discussion around IR35 with prospective employees during recruitment
- Developing a process to deal with any contractor disputes regarding the status you assign them.
- Making sure you have the right tools in place to pay your workers correctly and submit payments to HMRC.
Thinking about changing the way you pay your employees because of IR35? Primo Umbrella can help with that! Read more about the features here.
As with any legislation change it’s important you stay up to date and make any necessary changes. Stay compliant; keep yourself out of trouble.
It’s not always straight forward so we recommend you seek advice from an IR35 expert to ensure you make the right decision. HMRCs Check Employment Status for Tax (CEST) tool can also help to guide you. Click here to check it out.