IR35 – Off Payroll Working April 2020 and potential impact for advisory firms
The list of factors is not exhaustive, but the following factors are regarded as the most important: Personal service In order for the worker to be an employee, they must be obliged to provide their services personally. If the worker is entitled to provide a substitute to do the work, this may point away from an employment relationship. However, the absence of a right of substitution will not necessarily make the situation one of employment. Mutuality of obligation The HMRC guidance states that as a minimum, in an employment relationship there must be an obligation on the part of the worker to provide his or her work or skill and an obligation on the part of the engager to pay the worker for that service. Right of control The employee must be subject to a certain degree of control by the engager, although control need not be exercised in practice. It is, according to HMRC, the right of control that matters. This control may take the form of the way in which a worker performs their services; what tasks have to be performed and when and where they must be performed. For example, an employee will usually be expected to work set hours each day or week. An independent contractor is more likely to have the freedom to work when and where they want. The fact that a worker may be told how to perform duties will usually be seen as a strong pointer to employment but, where the worker is an expert the absence of this aspect of control would probably not be seen as that significant. Right of substitution and engagement of helpers If a worker has a right to send a replacement or engage a helper, and particularly if the worker has to pay any replacement or assistant, this would be an indicator of self-employment. However, it would also be relevant to look at whether the firm has a right to reject a substitute (and whether the right is exercised on a regular basis) or whether, for example, the worker’s right is only to propose a substitute. Provision of own equipment A self-employed contractor would generally provide whatever equipment is needed to do the job. In contrast, where a worker is provided with the necessary equipment and materials that would point to employment.
Off-payroll working rules (sometimes known as IR35) change on 6th April 2020 and are applied differently. From this date, all public authorities and medium and large sized firms will be responsible for deciding the employment status of workers. The definition of a medium or large sized firm is where a firm meets at least two of the conditions set out below: n You have an annual turnover of more than £10.2 million n You have a balance sheet total of more than £5.1 million n You have more than 50 employees This is in line with the small companies’ regime. If you are an unincorporated entity, the test applied is whether you have an annual turnover of more than £10.2 million. Details of the rules can be found on the Government website . IMPACT FOR ADVISORY FIRMS The vast majority of our advisory firm clients should be unaffected by the new rules coming into force as they will not meet at least two of the conditions set out above. Although the new rules do not apply to small firms, the old IR35 rules will continue to apply to any affected individuals. EMPLOYMENT STATUS IR35/Off Payroll Working is an issue that deals solely with the taxation treatment of workers. Aligned to this issue is the test of whether a person is genuinely a self- employed person, or whether they would qualify as an employee or worker. Should a person who you consider is self-employed actually be classified as an employee/worker, it has further consequences for you as principal in addition to the tax status. HMRC has published guidance on the factors it considers to be the most important in determining an individual’s employment status: https://www.gov.uk/hmrc-internal-manuals/ employment-status-manual/esm0500
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