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Is your business ready for IR35?
IR35 was first introduced in 2000. It is designed to reduce tax avoidance by contractors whom HMRC believe to be ‘disguised’ employees. These ‘employees’ are working in a similar way to a proper employee, but bill for their services through their limited companies. This limited company could be referred to as a ‘personal service company’ or PSC. A personal service company is usually a limited company that typically has a sole director, the contractor, who owns most or all the shares. Many self-employed workers will operate under a PSC rather than be a sole-trader.
Contractors come in different guises. For instance, currently, you could employ a graphic designer who leaves their permanent job on a Friday and returns to your business on the following Monday as a contractor working under their own limited company. He or she will be performing precisely the same job in the same way as they did as an employee, but with different benefits and liabilities.
However, the rules are about to due to change, and these changes could put your business at risk.
From April 2020, the IR35 rules will change, and the burden and liability will fall on the employer rather than the employee.
What are the IR35 rules currently?
Currently, to show that there is no employment relationship, the contractor must prove certain relationship criteria to determine whether they are ‘inside’ or ‘outside’ IR35. There are several basic things to keep in mind as an employer
You, as the employer, should not supervise, direct or control how the contractor delivers the services. Further, consultants must not be treated as employees and should not receive the same benefits as employees.
A right of substitution:
The consultant can provide a substitute if he/she is unable or unwilling to do the work and the employer has no right of veto as long as the replacement has the right skills/qualifications. This needs to be something that can be practised in reality and not just written into an agreement.
Nothing in the contract should prevent the contractor from performing paid work for more than one client concurrently.
No mutuality of obligation:
During an engagement, there is no obligation for the consultant to provide any services outside of those documented on the Statement of Work. Similarly, at the end of the contract, there is no obligation for the client to offer more work to the consultant and, if more work were offered, there is no obligation for the consultant to accept such work.
Consultants should demonstrate some financial risk around delivery of the services – e.g. if rework is required, it should be done at the consultant’s own cost and expenses.
What will happen when the rules change?
Private-sector employers hiring contractors will be responsible for determining their IR35 status, rather than the other way around.
All medium and large-sized private sector business owners will be responsible for determining whether or not the rules apply, and a worker is ‘inside IR35’ or ‘outside IR35’. Where the business is considered ‘small’, the worker/limited company contractor will remain responsible for deciding whether IR35 applies. There are certain criteria, outlined below, which will determine whether your business would be considered to be small.
To qualify as a small company, a company that is not otherwise ineligible must meet at least two of these three qualifying conditions:
turnover of £10.2m or less;
£5.1m or less on its balance sheet; or
50 employees or less.
What will I need to do as an employer?
Firstly, you will need to see if your business meets the HMRC conditions and determine the size of your business.
As the employer, you will need to decide the employment status of a worker, and you must do this for every contract you agree with an agency or the individual contractor.
IR35 will work on an engagement by engagement basis. This means each contractor you employ could have a different status so you will have to consider them individually.
You will need to be clear on your reasons for determining the status of their employment and ensure you keep detailed records of each determination, including your reasoning and fees paid.
You will need to have processes in place to deal with any disagreement which may arise from your determination.
You could be held liable for making the wrong determination.
You could become responsible for sick pay, holiday pay, pension contributions and other employee benefits.
If you employ your contractors via an agency, the law states that the responsibility lies with you to make a determination on IR35 status. Failure to take reasonable care when you make a determination about the employment status of a worker could result in the worker’s tax and National Insurance contributions becoming your responsibility.
Small-sized employers in the private sector will not have to decide the employment status of their workers. This will remain the responsibility of the worker’s intermediary, so their agency.
HMRC have published some outline advice, but IR35 is a complex tax legislation which is easily misunderstood and administered incorrectly. We recommend you take advice as to where your business responsibility lies.
Payroll services include:
- Collating, processing and calculating your payroll: hourly, weekly or salaried
- Administering sickness and absences, calculation of statutory entitlements including SSP, SMP and SPP
- Managing flexible benefit schemes, handling collection agency, employee loans and other deductions.
- Providing payslips, processing leavers and supplying management reports
- Submitting RTI online submissions to HMRC providing: P45s, P60s and P11Ds
- Assisting with auto-enrolment obligations, ensuring correct levels of contributions are calculated, deducted and notified to your chosen pension provider