Private sector employers and IR35 liability

From April 2020, medium and large private sector organisations will be responsible for making the decision over whether a self-employed contractor falls within IR35 legislation or not. This move will bring affected companies in line with the current public sector obligation.

What is IR35?
IR35 is the name given to tax laws which seek to ensure that contractors who are held to be self-employed are paying tax in the correct way. If someone falls ‘inside’ IR35, the contracting organisation (the employer) pays the tax on behalf of the individual to HMRC. If they fall ‘outside’ of IR35, the individual is treated as self-employed for tax purposes and pays their own tax.

Who is affected by the changes?
In general, private sector companies who meet at least two of the following criteria are affected:

• Annual turnover of more than £10.2m;
• Balance sheet total of more than £5.1m;
• More than 50 employees.

What’s changing in April 2020?
Currently, contractors working through limited or personal service companies who are engaged to work with a private sector employer make their own determination on their tax status. From April 2020, the liability for making that decision will switch from the contractor to the employer. Any employers within the scope of the above criteria will be responsible for making that determination. The new laws do not affect those acting as sole traders.

The important factors that are taken into consideration to make that determination are similar to those used to determine employment status for employment rights purposes, but are not identical. The factors include but are not limited to:

• Whether the contractor may send someone else to do the work in their place;
• How much control the employer has over the contractor to tell them when, where and how to do the work;
• Whether the contractor is obliged to accept work from the employer.

What do I do with the determination?
The employer must provide the determination and the reasons for making it to the contractor, or organisation that the employer contracts with. Reasonable care must be taken when making the determination; failure to do so can result in liability for the individual’s tax and national insurance payments falling on the employer.

If the contractor disputes the determination, employers should re-consider their decision by taking the reason for the dispute into consideration and a response provided within 45 days. Again, failure to provide this response on time will result in liability for the individual’s tax and national insurance payments falling on the employer.

What help can Peninsula provide with this?
Peninsula has worked with its partner company, Croner Taxwise, to set up a dedicated helpline to answer queries from our clients on how the new IR35 law will work from April 2020. This telephone service is free to Peninsula clients and is available on 0844 728 0259 between 9am and 5pm, Monday to Friday.

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