IR35 And What UK Employers Hiring Independent Contractors Should Know
April of 2020 is going to mark a major change in UK in-country labor laws and regulations, with the expansion of IR35 laws. For many companies, this is going to mark a major shift in the way that they use independent contractors. That means it will be more important than ever to make sure that your company is adequately prepared if you plan on doing business in the UK now or in the future. Here’s a closer look at what these laws entail and how your company needs to react.
What Are The IR35 Laws?
Technically, IR35 has been around for quite some time. In its original form, it was designed to keep companies from engaging in “disguised employment.” This essentially refers to the practice of a company having a worker registered as an independent contractor, but essentially doing all the same tasks an employee would. By taking this route, they can save on income taxes, but are skirting the rules.
IR35 enabled Her Majesty’s Revenue and Customs (the UK tax authority) to collect an additional payment under these circumstances. For example, if a contractor was working through an intermediary, such as a limited company, and would be an employee of their client if not for said intermediary, IR35 would apply.
Curious if this applies to your employees? Here are a few signs that your employee may be more of an independent contractor:
- Doing their service billing a personal services company (PSC)
- Creating their own business, then paying themselves a salary
- Getting income classified as dividends. These are exempt from contributions to National Insurance.
- Paying a lower amount than 45% in income taxes on earnings
To give you an idea of the last point, full-time employees would be paying taxes/NICs up to 45% and 12%, respectively. Basically, this means more income for the employee, but less tax money for the country (IR35 does not apply to the self-employed). By 2017, reforms to IR35 resulted in an additional £550 million brought in through income tax and NICs, and many workers across the country needed to reclassify.
The government regulators considered this a major success and is now extending from public sector employees to private-sector employers. The 2020 update is likely the reason that you’ve seen a lot of 2020 updates lately regarding IR35. The major change is extending the provisions set in 2017 to
to independent contractors, recruitment agencies, and medium/large companies in the private sector.
Note that approximately 1.5 million small private businesses are exempt from this set of updates. Here are the criteria to define those:
- Employing less than 50 people
- Annual turnover of less than £10.2 million
- Balance sheet must have a maximum total of £5.1 million
Preparing Your Company For IR35
So, let’s say that you don’t fall into any of the above categories. How can your company prepare? The first step you can take is using the HMRC tool called CEST to classify your workers and figure out if they apply as independent contractors. If you are honest, you should get an accurate answer, though there may be some exceptions. If you disagree with the answer, be sure to see a tax specialist for guidance. If a worker disagrees with your statement, you have 45 days to respond. Make sure you have a dispute resolution policy, as there may be many examples of conflict here.
These aren’t the only steps that you should take to protect your business. Some of the other items your company should focus on include:
- Planning for any related costs
- Revisiting worker status for those employed through outside contracts or PSCs
- Seeing if IR35 provisions will alter contracts after 2020
- Talking to current contractors about relevant changes
- Establishing a plan for any future working relationships that may be impacted by IR35
Perhaps the most important thing is figuring out what to do with your off-payroll employees now and in the future. A key step to take here is making sure you have a different onboarding method to ensure they aren’t taking part in employment practices they are not entitled to. If you plan on partnering with PSCs or similar businesses, you also need to make sure they have systems on the books that will guarantee compliance. Be sure that you are mindful of other off-payroll working rules as well.
For example, the PSC can pay the worker outright. This is managed through their payroll without deducting any more tax. As an alternative, they can receive payments as dividends. On the other hand, HMRC has confirmed that they will not normally seek tax from earlier years if the treatment has changed.
Overall, despite these facts, using a global PEO solution is the best way to ensure you stay in HR and legal compliance with all employees or independent contractors across multiple countries, not just the UK. IR35 law is only one example of the various ways that we can expect employment laws to evolve in the future.
Acumen with its hyper-local expertise in labor codes of over 190 different countries is your ideal way to stay compliant without the need to learn multi-country legal terms and requirements. In addition, our global EOR service frees you from the need to open a separate business entity to operate internationally.
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