Do IR35 Rules only apply to contractors and workers in case they're third party? We employ the services of locums, who are self-employed. Does it apply in that case?"Posted in : Seamus Says - Employment Law Discussion on 6 September 2019
Seamus: Hopefully, I'll be able to give some clarification. I guess it is very complex and it's certainly not one of the lighter topics that you would be looking at. But just by way of background, IR35 was originally brought in in 2000 and it was designed essentially to assess whether a contractor was a genuine contractor, or rather that, as the Revenue call them, a "disguised employee" for the purposes of paying tax.
Essentially, there was an attempt made by the Revenue to tackle alleged problems of abuse by contractors. So, what a lot of people were doing, where they were registering themselves as limited companies or as the Revenue called them, as personal services companies, or PSCs.
They were utilising a tax loophole there, essentially, that they were able to put themselves through as a limited company and then they weren't having to deduct any tax or national insurance from their payment. They were losing out on various aspects as well because they didn't have the status of an employee, but the tax benefits were certainly of assistance to them.
So, you can see always the good old adage of death and taxes, and Revenue and Customs looked at this. What essentially, they did — and there's obviously a bit of history to it. You can go onto Revenues and Customs website. There are various types of toolkits, as they call them, to distinguish whether or not you're an employee or whether you're self-employed or a contractor and what it is.
But they took this process of trying to shut down the failure and the abuse that was happening of some people not to pay tax and national insurance. So, they were saying, "Look, I'm self-employed. Do not make any deductions of tax and national insurance." And then whenever they filed their end-of-year tax returns with tax and national insurance then the Revenue are assuming that they haven't been making their payments as they should have been.
Scott: This is really individuals who are employing themselves, if you like, through a limited company.
Scott: It's similar but it's not the same as a lot of contractors working on a building site, and they're all claiming to be self-employed, but may not have IR35 status. They're just saying, "I'm self-employed."
Scott: But they haven't set themselves up as a limited company, a slightly different...But these ones are people who set themselves a limited company and effectively pay themselves a little bit of money out of the profits of the company.
Seamus: Out of the profits.
Scott: And therefore, their argument, "Hey, I don't have to pay full tax as an employee."
Seamus: Exactly and trying to shut that down. So, things have progressed. Certainly in 2017, Revenue and Customs changed the position specifically in around public authorities, and specifically looking at, this question is about locums. So, we're possibly talking about the likes of GPs, dentists, opticians, those sorts of rules. Maybe wrong on that. Hopefully not. But the idea behind it is pretty much all the same. So, in 2017, Revenue and Customs said that it wouldn't be possible any longer to pay contractors via PSC without deductions at source.
So the position was changed, essentially, that the onus was very much put on, in the public sector, for the employer, the hirer, the engager — whatever way we want to term that — to make the assessment and to make the deductions as and how they should have been. So that process has been happening in the public sector for 2017. These more recent changes are now moving into the private sector. These are going to be coming...
Scott: …..in April next year.
Seamus: ...April 2020 is what we're looking at. So I think it's a good opportunity for organisations, businesses, companies to start to review presently how they process payments in relation to their self-contractors. Because the key thing on this is that if they don't make the deductions properly and as how Revenue and Customs might determine later on, it will fall to the responsibility of the company to make those payments.
That can create a huge difficulty. You're talking about retrospective payments and possibly claims from Revenue and Customs for a substantial amount of monies. If you think of, if you have maybe 30 or 300 people on the building site and you've been processing them all as...
Scott: As self-employed.
Seamus: ...self-employed and not making any deductions for them, you could imagine the significance of getting such a hefty bill through the door from Revenue and Customs. So, it's not at all that the rules are changing in any way. It's more that the responsibility under the rules is changing. And it's very clear that it's moving over to the business, to the company. Whether you call them the hirer or the employer or the engager...
Scott: It's whoever pays the money.
Seamus: ...whoever pays the money has the responsibility to make those deductions. So you really need to be making sure that you're applying the guidelines carefully. And I would have thought that in such circumstances that you're making a written note of why your considerations are that they're self-employed or they're not.
Some of the helpful information that's on there, it talks about all the things that we'd be familiar with in terms of looking at whether someone is an employer or worker. Are they working at a certain place, or if they're a locum, are they at a specific practice? What equipment are they using? Are they using their own equipment or are they using equipment that's provided to them? Are they working specific shift patterns? The other thing is are they in charge of leading a team or are they part of the team?
But the clear things are always this right to substitution and the ability for a contractor to send somebody else in to do the work. And that's going to remain of particular importance. And I think that we would need to be thinking about those things of supervision, direction, control, substitution being a real key one.
If I have a contract with you, Scott, and I have another contract along the way that I'm going to get double the money from and I say to you, "Scott, I can't make it in that day, but I'm going to send Rolanda along instead to do it," and if that's fine, that's a good indication that you're self-employed and that I'm going to fall outside of IR35.
But we're talking about that mutual obligation. If you're falling within it and if the tests that you apply, and if you use the Revenue and Customs test, I think the majority of the time you're going to fall within IR35. They want their...
Scott: They want their money.
Seamus: They want their money. So I think it's definitely going to create a position where there's going to be a greater cautious approach. Businesses are going to want to pay the money and make those deductions at the time. They're not going to have to want to worry about it further down the line.
And I can see that there will be certain pressures that will be on businesses. I could imagine self-contractors arriving with letters from their accountants saying, "This person should be processed as a self-employed worker" and things like that. So I can see that it can create a bit of anxiety for...
Scott: It’s probably not going to be enough that you just take the word of an accountant.
Scott: You would be expected to do some kind of due diligence here.
Seamus: Absolutely. And I think the key thing is, making your notes, making your records, and retaining those, possibly before, within that tax year and then after that, maybe under GDPR, shredding them at that point. But certainly, the onus is going to fall on you. Revenue and Customs are going to pick this up by their sort of annual inspections that they're going to do. And you can be guaranteed from April 2020 that they're going to be focussing on it.
Scott: And that the self-employed contractors, as they are at the moment, will be looking for more money if they're going to be getting taxed.
Scott: Mark McAllister will be dealing with the IR35 and any updates at the Annual Reviews of Employment Law conference in November.
The information in this article is provided as part of Legal-Island's Employment Law Hub. We regret we are not able to respond to requests for specific legal or HR queries and recommend that professional advice is obtained before relying on information supplied anywhere within this article.