Who is responsible for determining whether an individual comes under the IR35 regime?Posted in : Seamus Says - Employment Law Discussion on 8 January 2021
Who is responsible for determining whether an individual comes under the IR35 regime?
Seamus: This is a broad question. IR35, we can see from the poll there that there remains confusion in relation to the change in the legislation. And that probably has come about from the fact that the proposals were postponed last year, and we've taken our eye off the ball. But from my understanding, we're hitting April and the rules and the regulations will change at that point.
So maybe just take a bit of a time to explain this. Under the IR35 rules, if a contractor would be deemed to be an employee of the client . . . I don't want to get into the definitions of contractor and client. If the contractor will be deemed to be an employee of the client for their personal service company, they have to pay taxes if they were an employee.
And public sector clients have been required to deduct tax and social, and IR35 applies since 2017. So there should be a familiarity in public sector with this, but now it's moving into . . . the government are extending it out into the private sector.
So the responsibility for determining the employee status of individual contractors for tax purposes will rest with the client, or the would-be employer if I put it that way. So the client or the would-be employer is the organisation who is or will be receiving the services of a contractor. And they can also be known as an engager, a hire, or the end client. And the client must be responsible for determining if the off-payroll working rules will apply.
So the client or the would-be employer . . . maybe if we put it that way, it's slightly more explanatory. But if the client decides that the contractor is an employee for tax purposes, they or the entity that pays the contractor's intermediary will be responsible for operating PAYE. The client must share the determinations that they've made with the contractor and provide reasons if they're requested to do so.
So the key thing there is really that the responsibility will fall on the company, client, or the would-be employer if they have to deduct the tax and National Insurance. If they fail to do that, there could be a huge liability that arises between the company and HMRC in relation to those, because the responsibility is on them source.
So it would be the same as the employer-employee relationship. But at this point, because that relationship isn't actually in place, it's for the company to make a decision as to whether that applies or not.
A lot of self-employed individuals have set up these companies, the personal service companies, in order in a way to avoid having to pay the tax and National Insurance that they would as an employee. That's it put very crudely. There are many good reasons why there are other steps taken to operate that way. But this is what the government are trying to clamp down in relation to it.
With the position for the contractor, if the company or the client is a small company, your company is responsible for assessing whether IR35 will apply. The Companies Act of 2006, just to mention, defines a small business as a business with two or more of the following: that you have a turnover of £10.2 million or less, or you have a balance sheet total of £5.1 million or less but you have 50 employees or fewer. So it's two or more of those then you fall in that aspect of being a small company.
And that's where the issue will arise for a number of companies as they're having to make this determination and then to deduct the tax and National Insurance at the source.
So the question is "Who's responsible for determining that?" The response to that is if you're an HR advisor or manager, your company is responsible for making that decision.
Scott: Yeah, and the trouble is if you get it wrong, if you say, "No, this person is genuinely self-employed, and we don't pay tax and National Insurance", and HMRC come after you, the company pays the money. They got it wrong. So you've got a bill sitting and waiting for you if you get it wrong.
But if you decide that they are the equivalent of employees, then those people end up paying more tax than they have done hitherto. And therefore, there may be issues about them deciding that they're going to go work somewhere else because they're generally self-employed.
Seamus: That's going to be the big issue for employers, this risk, this liability that could occur as a result of not deducting the appropriate tax and National Insurance or making those deductions and HMRC coming in and doing an inspection and saying, "Here's your bill. I need a pay. Thanks very much". And at that time, your ship will have sailed because you'll have already paid the monies out to the contractor essentially. So huge liability, huge risk down the line, I think, for a lot of employers.
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