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IR35 for Dummies

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  • Kaysi is a specialist in commercial field sales with a focus on payroll and accountancy and B2B sales.

It’s hard to go on Linkedin these days without seeing articles, posts, blogs, polls, arguments (!) about IR35. I’ll be honest, when I started in recruitment I had never heard of IR35…and why would I? But now, it is a crucial part of my life and is usually the foundation of most conversations I have with clients and candidates alike.


So why is it such a big deal?

First of all, this only applies to workers who are set up as a Personal Service Company (PSC). It does not apply to umbrella, direct employees or self-employed sole traders.

IR35 is not a new piece of legislation. It has actually been around since 2000 to try and combat what is now being termed as ‘disguised employment”. Basically, it has been known for some individuals and employers to agree to be paid via a Ltd Company, when they are actually working as a ‘normal employee’. This means that they get the benefits of lower tax and the employer doesn’t have to offer the usual employee benefits or pay the usual NI contributions. In 2015, however, HMRC decided that IR35 was ineffective and that “non-compliance with the legislation is widespread”, resulting in a 2016 Budget proposal to shift responsibility for tax status determination to the end client, in the hope of improving compliance. In April 2017, instead of contractors determining their own IR35 status, the government shifted this responsibility onto public sector organisations. In April 2020, this will be extended into the Private Sector and the responsibility will be placed onto the end users rather than the contractor.


In or Out?

A contractor’s IR35 status is determined by the following criteria. To be seen as ‘inside IR35’, the following 3 factors must be present:

  • Mutuality of obligation: Does the company have an obligation to pay the contractor and does the contractor have an obligation to work for the company?
  • Personal Service: Does it have to be the specific person who carries out the work or can a substitute be provided?
  • Control: Is there a Master Servant relationship?

 

HMRC developed the Check Employment Status for Tax (CEST) tool to help businesses and workers determine their IR35 status, however, 38% of public bodies used HMRC’s CEST tool as a source of information for determining IR35 status and, of these, 22% said that the tool was either “not very helpful” or “not at all helpful.

These changes are already making waves within sectors such as the financial market with corporations such as Barclays, GlaxoSmithKline, HSBC and Morgan Stanley rumoured to be refusing to hire contractors on an “off-payroll” basis, some with a “Go Perm or Go Home” approach. This comes as businesses want to avoid having to assess the IR35 status of contractors under the new rules. This means there will now be more competition for fewer contract roles. In recent surveys, 58% of companies said that they would consider similar approaches.

Although there is a lot of talk surrounding the looming April 2020 changes, nobody really knows for certain the effect that there will be on the market and the economy. From a personal perspective, I have seen an obvious shift in candidates preparing for the changes and trying to ensure that they are working within a business who has the knowledge and capability to be able to provide high level service in a compliant manner. It seems to be increasingly important to candidates that their employers are fully prepared and equipped to face the changes in April.

In terms of my clients, it has become apparent that the ones who are attracting the top talent are the ones who can not only offer healthy salaries, earning potential and progression, but the companies who can assure their potential hires that they have a solid strategy to face these changes.

 

I’m not being sarcastic when I say….there’s never a dull moment in Payroll!

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