What are the changes that IR35 will make?
September 18, 2019
We are very honoured to have Emma Spandrzyk of Keelys Solicitors share this guest blog with us. Her piece addresses some of the key insights many of you will have been thinking about when it comes to IR35.
I have recently joined Keelys in the employment department. I have been working as an employment solicitor for 9 years and, most recently, I have worked in-house for the police.
Some of our clients have been asking us about changes to the law on IR35 next year so we’ve taken some time to explain some of what is happening.
What is the current position?
If someone works on a self-employed basis but, in reality, they are an employee, HMRC can recover the underpaid tax and national insurance from the organisation that they work for.
Sometimes, the individual will set up their own personal service company to provide their services. If HMRC decides that the arrangement is a sham and that, if the individual was engaged directly by the client, they would be an employee, HMRC can recover the underpaid tax and national insurance under IR35. Currently, that is recoverable from the individual and/or their company rather than from the end-user. The exception to that is in the public sector, where the end-user will be liable for the tax and national insurance.
What is changing?
From April 2020 businesses with more than 50 employees or a turnover of more than £10.2m will be affected by the new rules. They will, therefore, be liable for tax and national insurance if they are found to be engaging people through personal service companies who, in reality, ‘are’ employees. If your business is smaller than that, you do not need to worry although we would not be surprised if, in future, these rules apply to smaller companies as well.
How to tell if someone falls within IR35?
If you are a larger business who will be covered by the new rules, the first step is to identify the contractors that provide their services through personal service companies.
To assess whether contractors fall within IR35, businesses will need to look at a range of criteria including the following:
- Control – how much autonomy does the contractor have in terms of how they deliver their work? If the business retains full control over how, when and where tasks are completed, this is indicative of employee status and the contractor is likely to be caught by IR35. If the contractor has full autonomy over the completion of tasks, they are more likely to fall outside the scope of IR35.
- Personal Service – does the contractor have to undertake the work themselves? The ability to send a substitute helps point towards a contractor being genuinely self-employed and outside the IR35 rules.
- Mutual Obligation – is there a requirement for both parties to continue to offer and accept work? If the business has an obligation to provide work and there is an expectation that the contractor accepts it, then this will indicate that the contractor is caught by IR35.
As part of the assessment, businesses should also consider factors such as the degree of integration that the contractor has with the business, the level of financial risk they assume and who provides the contractor’s work equipment.
What does this mean for your business?
Businesses will need to show HMRC that they have taken reasonable care in undertaking their contractor assessments. When reviewing assessments, HMRC will look at the size of the business. The bigger the business and the greater the resources available to it, the more effort HMRC will expect in relation to the process.
There is a useful tool on the HMRC website that you can use to assess whether someone is genuinely self-employed or should be treated as an employee: https://www.gov.uk/guidance/check-employment-status-for-tax
Written statements of particulars
Employers will be used to providing employees with a written statement of terms within two months of starting work. However, from the 6 April onwards, this will become a day one right.
This right will also extend to all categories of “workers” and will not be limited to individuals engaged under a contract of employment. It will, therefore, apply to zero-hours workers.
You may also have heard that some additional information should be included in the statement. However, we do not suggest that you make any changes to your contracts because the additional items are very minor. The key thing to ensure is that any new hires post 6 April are given a written statement on day one.
There is no obligation to issue your existing staff with a new statement. You only need to take this step if an individual specifically requests new particulars.
The reference period for determining an average week’s pay for the purposes of calculating holiday pay is increasing from 12 to 52 weeks. This is intended to limit the impact of seasonal fluctuations in work on holiday pay.
If you are currently using the 12-week model, you will need to amend any calculations to cover 52 weeks from 6 April 2020.
Under the “Swedish Derogation”, temporary work agencies can avoid the obligation to pay agency workers the same as the client’s direct employees after a 12 week qualifying period if certain conditions are satisfied.
From 6 April 2020, this derogation will be abolished. This means that all agency workers will have the right to pay parity with permanent employees after 12 weeks.
Tax on Termination Payments
At current, termination payments up to £30,000 can be paid free of income tax or employer’s National Insurance Contributions. Any amount over the £30,000 limit is subject to income tax deductions only.
From 6 April 2020, all termination payments above £30,000 will be subject to both income tax and employer National Insurance Contributions. This is in addition to the changes last year whereby all payments in lieu of notice are subject to tax and National Insurance.
Parental Bereavement Leave
Another right coming in to force on 6 April is the right to Parental Bereavement Leave known as “Jack’s Law”. Working parents who lose a child under the age of 18 will get two weeks’ statutory leave. We suggest you update your Dependent Care Leave Policy with the following wording to reflect this.
“Parental Bereavement Leave:
Staff who lose a child under the age of 18 are entitled to two weeks’ parental bereavement leave which can be taken in a single block of two weeks or as two separate blocks of a week each. The leave can be taken at any time in the period of 12 months after the child’s death. Staff with 26 weeks’ continuous service and weekly average earnings over the lower earnings limit will receive Statutory Parental Bereavement Pay during any period of Parental Bereavement Leave.”
Current Rates and Limits
April 2020 will also see the usual annual increase to the following rates and limits:
- The National Living Wage (for workers ages 25 or over) from £8.21 to £8.72 per hour.
- The National Minimum Wage rates:
Workers aged 21-24 – from £7.70 to £8.20 per hour
Workers aged 18-20 – from £6.15 to £6.45 per hour
Workers aged 16-17 – from £4.35 to £4.55 per hour
Apprentice rate – from £3.90 to £4.15 per hour
- Statutory Maternity Pay and Statutory Paternity Pay will increase from £148.68 to £151.20.
- Statutory Sick Pay will increase from £94.25 to £95.85.
Please let me know if you would like further advice on this. You may also want to speak to your accountant for advice on whether you are taxing staff appropriately.