As the 6 April 2020 deadline looms, SMEs and large companies are on the hunt for disguised employees.
We are part of your search party and will help you identify those contractors who are employees in disguise.
Background
The Government wants to make sure it gets as much tax from us all as possible. IR35 is anti-avoidance legislation targeting individuals who are managing their financial affairs to pay as little tax as possible within the confines of the law. So instead of paying tax and National Insurance through a PAYE process, they are paying tax and National Insurance as a self-employed person or limited company which is significantly less.
The individual benefits from paying less tax and the company engaging them does not have to pay National Insurance contributions or benefits. They also have the flexibility of having a contractor when they want them.
Who does this apply to?
From April 2020 the risk and obligation shifts from the individual to the end-hirer. This applies to all medium and large companies with more than 50 employees, or turnover of £10.2 million, or a balance sheet of £5.1m.
What is a disguised employee?
A disguised employee is a contractor or worker who fills a permanent position, acts the same as a permanent worker but is not paying tax and NI in the same way as someone being paid via PAYE.
Questions to ask?
In order to check whether your employees are disguised or not, ask yourself the following questions:
- control: are they in control of how they work, working hours etc?
- substitution: can they send someone else to do the work they have been asked to do?
- employee benefits: there is no sick pay, holiday pay or invites to the Christmas party?
- provision of equipment: do they bring in their own equipment?
- right to dismissal: do they have to give you notice to terminate the contract?
- financial risk: how much risk do they have for any errors made, do they have to rectify things in their own time?
- exclusivity: do they work for other clients?
If you answered yes to the questions above, they will probably be a true contractor and therefore outside IR35. If you answered no to the questions, they may be employees and therefore inside IR35. If they are inside IR35 then tax and National Insurance needs to be deducted. They also cannot claim tax relief on travel expenses which may result in a reluctance to travel long distances.
Reasonable care in response
This legislation was introduced to the public sector two years ago. The response was largely to introduce a blanket ban on services through Personal Service Companies (PSC) and deduct tax from everyone.
The Government is keen for business to conduct a proper assessment of the workforce before applying changes, ie take reasonable care in responding to this.
Workers inside IR35
If a worker is inside IR35 they can be taxed as an employee but will not get pension contributions and will not have employment rights. Therefore a contractor may claim they are an employee and become eligible for employment rights and benefits.
Check employment status for tax tool
There is an online tool called “check employment status for tax” tool. The tool asks a series of questions around employment status and gives you the output. The tool has been widely criticised over concerns it is missing one key element of employment status case law. It has been found to be weighted in HMRC’s favour and will find more inside IR35 results when using it.
Employers’ checklist:
To help you go through the IR35 checking process, we recommend the following:
- identifying the number of contractors (individuals through own Personal Service Company) directly hire or through a recruitment company
- consider what terms are in the contract and working practices
- ask yourself the questions outlined earlier, ie three headline tests: degree of control, named individual to fulfil the task and Mutuality of objection (can they work elsewhere)
Note there is currently no definition of reasonable care. HMRC will look at the size of business, reasonable HR resources will expect the company to take it seriously. HMRC will seek tax and NI for any contractors which they see as employees.
Other things to consider
- think about the distance you are asking contractor to travel, you may have to pay them more
- where do you need flexible, skilled resources
- if you have had people doing the same job for a long time, then look at perhaps taking them on as employees
- in small companies the individual remains responsible for their IR35, this is the same if hired via a recruitment agency
- provided that everyone in the supply chain fulfils their responsibilities, the ‘fee payer’ will carry the liability
- end client to supply a Status Determination Statement citing reasons for decision
If you feel you would like help and guidance in this area, please contact our employment specialists at emphasis hr & training where we can talk you through the process. Call 01794 874232 or email: hello@emphasis.uk.com
