There was a fairly seismic change in the tax rules for employing contractors at the start of this month – and it’s already causing headaches.
Under the new IR35 arrangements, if you hire self-employed people and are a medium or large-sized enterprise, it’s now your duty to make sure you do so on the correct tax basis.
The change means that anyone you take on consistently should be employed on a PAYE basis rather than being left to look after their own tax affairs.
The good news is that HMRC has promised to take a light touch in the first 12 months of the new system – but they will be checking that companies are following the rules and their patience is unlikely to last long.
The starting point in all of this is to determine if the person you are contracting with falls inside or outside of IR35.
If they are outside, their tax affairs remain their own business and you can pay them on invoice with no deductions, just as you will have been doing up until the start of April.
Complications arise though if the person falls inside IR35 arrangements. This means they are regarded as a ‘deemed employee’ for tax reasons (they don’t get employment rights) and you as the employer are responsible for deductions.
So, in this case the person is taxed on the same basis as if they were an employee and pays the same National Insurance as if they were on your payroll.
One useful tool provided by HMRC is something called Check Employment Status for Tax (CEST) which you can use to see if the way you are hiring someone means they fall inside or outside IR35. You can find it here and HMRC has pledged to abide by its results – although there are reports that it does return a high number of ‘no result’ decisions.
These new IR35 rules apply on a contract basis – so you’ll need to check and consider the ramifications each time a new contract is issued. It might mean that sometimes your relationship with a worker will be inside IR35 whilst at others it may not.
There is no obligation to offer membership of a pension scheme to anyone inside IR35 but deemed employees should receive a P45 at the end of their employment and a P60 at the completion of the tax year.
And the new legislation does not apply to small companies, where it will remain the service provider’s responsibility to organise their tax. A small company is defined here as having two or more of the following features:
- A turnover of £10.2m or less
- A balance sheet total of £5.1m or less; and/or
- 50 employees or less.
If you haven’t got to grips with all this yet, then there really is no time to waste.
HMRC will be keeping a close eye on the system and it could be expensive to get on the wrong side of them.
Of course, if you need help or advice, we are happy to work with you and put your mind at rest. Just click on the button and we’ll do the rest.