Are you ready for IR35?
If the term “IR35” is unfamiliar to you and you do business in the United Kingdom, then take note: you have until April 6th to get up to speed and comply with IR35’s requirements, or else face the prospect of penalties and fines. But don’t panic! The details of IR35 are easy to grasp, and compliance is simply a matter of diligence.
First, the background: IR35 is a tax regulation created to stop workers providing their services through a limited company (or another intermediary) from skirting income tax and National Insurance payments that employers must withhold from an employee’s pay if the worker was "deemed" to be an employee.
Under IR35, a company must, for each individual who performs work for the company but not as an employee (but only where the worker provides services via an intermediary), classify that individual as either subject to ('on-payroll') or exempt from ('off-payroll' ) IR35’s tax payment requirements. A company must make the subject-to/exempt-from determination for all individuals provided to the company through an intermediary.
Companies that fail to comply with IR35 face potentially large penalties: in addition to having to back pay taxes, a violator is subject to fines at HMRC’s discretion. The company who pays the fees of the worker – not necessarily the third party who provides a worker – is on the hook for these penalties, as is the company who is the end-user of the worker's services, if they fail to undertake the subject-to/exempt-from determination. Given the risk that HMRC (the UK tax office) will impose hefty penalties on the first violators they identify to “make an example” them, a company should not delay its efforts to comply with IR35.
What, then, is a company to do? The critical point is that inaction is not an option. IR35 requires companies – so-called “end users” – to assess the status of all non-employee workers and the roles they undertake. Documentation is crucial: a written status determination statement (SDS) is your first line of defense to HMRC when investigating possible violations of IR35.
That said, an SDS is not in itself a get-out-of-jail-free card. Regulators will scrutinize the particulars of each instance of a non-employee who provides their services through an intermediary that is working for a company. The specifics of a given working arrangement are what matter. For example, a company cannot escape liability merely by stating in a contract that a worker is a contractor.
Thus far, HMRC has not defined the specific criteria for categorizing workers as subject to or exempt from IR35. That said, companies should look to the following sorts of considerations when classifying a worker as a contractor or an employee:
- Is the individual engaged directly with a company, or are they working through an intermediary?
- Are the working conditions for the individual the same as for employees?
- Does the individual have substantially the same responsibilities as an employee?
- Is the individual managed directly by an employee of the company? Are they managed in the same manner as the company’s employees?
- How much autonomy does the individual have in deciding how and when they handle a project?
- Is the project time- (or task-) limited? What are the terms for ending the project? Is it ongoing?
- Did the company provide the individual with equipment and/or training and/or a physical workspace?
This list of questions is not exhaustive. Note that none of the questions above is, standing alone, the only factor you must consider; the determination requires looking at multiple factors.
In dealing with the requirements of IR35, an apt maxim is the old saying, “forewarned is forearmed.” A company should begin its compliance effort without waiting for April 6th. For the company that promptly starts the work of making individualized SDSs based on the particular circumstances of each contractor and then documents the rationale for each determination, IR35 is nothing to fear.
If you're a business in the UK, you have until April 6th to comply with IR35’s requirements, or else face the prospect of fines.