IR35 affects all contractors who do not meet HMRC’s definition of self-employment. The legislation was designed to stop Limited company contractors working as disguised employees i.e. the individual would be employed directly and taxed under PAYE if it wasn’t for the existence of their Limited company.
From April 2020 the legislation shifts the burden of responsibility to the entity that engages with the contractor i.e. the end client. Meaning, the end user of the contractor will be responsible for correctly determining the employment status or IR35 status of the contractor.
If it is determined that the contract is inside IR35, PAYE tax and National insurance must be deducted by the end client or ‘fee payer’ (potentially a recruitment agency) and Employers National Insurance will become payable. The likely result will be an increase in contractors rates to account for the loss in earnings, unbudgeted financial implications for the main contractor and/or contractors abandoning projects leading to skill shortages and project delivery issues.
NB – An inside IR35 conclusion could also lead to the contractor claiming worker rights such as holiday pay.
The polar end of a IR35 assessment is of course an outside of IR35 decision. However, as above, a misclassification could be costly. There is the risk HMRC will come knocking, investigations can result in back taxes, penalties and interest. In addition, if it is discovered businesses are incorrectly deeming contractors as outside of IR35 without taking ‘reasonable care’, they could be facilitating tax avoidance, punishable under the Criminal Finance Act.
Blanket approaches could also pose considerable risks;
- They do not constitute ‘reasonable care’
- Insurance underwriters will not cover the tax risk unless an individual assessment has been conducted
- If investigated by HMRC, an inadequate role-based blanket assessment could trigger an extension of the enquiry window to six years due to carelessness. If the error was deliberate this could extend to 20 years. Individual assessments should limit enquiries to only four years.
The complexities of the IR35 reforms and IR35 status assessments often lead to confusion and avoidance. Therefore, seeking specialist advice and independent assessment can help you avoid the implications of misclassifications.
For more information, please Email info@onsitesupportservices.co.uk or Tel: 0845 077 7072.