why business owners should care about IR35 & off-payroll legislation

There has been much media coverage about IR35 of late, with additional legislation due to hit the Statute books from April 2021. Many refer to this impending legislation as “IR35”, but that is incorrect.

IR35 (the Intermediaries Legislation) has been around since 2000. It is, at the time of writing (…… ), new Off-Payroll legislation that comes into being next month.

Both are separate complex items of tax legislation that target tax avoidance, as perceived by HMRC, concerning the engagement of Limited Company contractors [the “subject-matter expert” (SME)] and the businesses that engage them (the “business”), where such perception is that the engagement is better defined as ‘deemed employment’. The difference between them, in layman’s terms, essentially boils down to which party is responsible for assessing the nature of the relationship between the business and the SME and therefore who carries the responsibility for legislative compliance and liability for tax.

Where IR35 Legislation applies, it is the SME who carries the obligations and the risks of investigation for any perceived tax avoidance upon the completion of the contracted engagement. Conversely, where Off-Payroll Legislation applies, the business is responsible for assessing the nature and status of the engagement, and it is down to the business or its representative agency to calculate, report and process employment tax payments, including any tax liability that arises from any later investigation.

The assessment takes the form of the original contract (including any Schedule appended thereto) and the actual working practices throughout a contracted engagement – it’s worth considering that an investigation could be initiated years after the engagement has ended. Tax liabilities under Off-Payroll could comprise of underpaid PAYE, employer’s NICs, employee’s NICs and Apprenticeship Levy on top of payments made to the SME, plus penalties and interest. Even where an agency sits in the supply chain between the business and the SME, there are circumstances relating to “reasonable care” and other transfer provisions that can result in tax liabilities being passed to the business, meaning that you essentially need to ensure compliance throughout the supply chain.

You would be forgiven for asking at this stage why, if you are able to ensure that the SME is the responsible party, should you take notice beyond this point… the fact is that the original IR35 legislation can only apply where the private sector business qualifies as a ‘small company’. Even where this does apply, you should still care deeply beyond this point, for the simple reason that any SME worth their salt will most passionately care and have all potential contracts independently assessed for their IR35 status. If you want your contract to attract the best expert currently available at a price that delights both parties, please read on.

Assuming you don’t opt for onboarding an SME as an employee – fixed-term or otherwise – with full employment rights, any benefits package on offer and the taxation model that applies to employment, it should now be clear that, ahead of engaging an SME, correctly understanding which of the two legislations apply is imperative.

Assuming you prefer to engage the SME using a ‘contract for services’ (often somewhat confusingly referred to as ‘outside IR35’, where the SME holds the responsibility for all things relating to the IR35 legislation), next on your list – before you start your search for an expert – will be getting the right information into the contract and accepting that working practices throughout the engagement must align with it.

Here at Javara, we will quickly help you start with the right foundations in place. With an understanding of your requirements, we will detail what factors the contract needs to address (and what factors it shouldn’t), what working practices you should both expect and embrace that align with an ‘outside IR35’ contract and draw up an action plan that you can follow to ready yourself for onboarding the expertise you seek in the manner that you prefer.

We have years of experience of providing expert services to clients of all sizes and we can assure you, without hesitation, that getting everything in order ahead of seeking out your expert will save you significant, and perhaps acutely frustrating, man-hours of negotiating with one or more potential SMEs over days and weeks, rather than just cracking on with that important project and leading your business day-to-day.

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