What does IR35 mean for your business?
IR35 tax legislation is designed to combat tax evasion by workers supplying their services via a Personal Service Company (PSC). The legislation currently operates in the public sector but is due to be introduced for private sector contracts in April 2021.
Changes to IR35
IR35 isn’t new. It was introduced back in April 2000 and applies to contractors who work via a PSC. Under the legislation, medium and large private companies are made responsible for determining whether contractors are inside or outside IR35.
So how will IR35 impact your business?
Making the status determination
Under the new rules, the end client and not the PSC is responsible for status determination for each assignment. As an end client you’re also responsible for deducting tax and NICs at source if a contractor falls inside IR35.
That means your staff have the additional task of running Status Determination Tests on all contractors, taking them away from their core business activities and your enterprise goals. HMRC’s CEST tool has been widely criticised but it does give a steer regarding the indicators that HMRC are looking for and it's critical for your business to be IR35 compliant. You'll be expected to apply several tests to determine status including the following:
- Substitution: could another contractor fulfill the same role?
- Supervision and control: does a contractor operate as their own boss or do you provide supervision and a list of jobs?
- Mutuality of obligation: Is the contractor obliged to accept the work?
- Nature of the relationship: is the contractor expected to wear a uniform and be part of the team?
If the answer to most of these questions is 'yes' then a contractor is likely to be ‘inside IR35’ and you as the fee payer become responsible for their tax. If, as an employer, you fail to use ‘reasonable care’ during the decision making process, you could be liable for any unpaid taxes from a contractor wrongly determined as ‘outside’ IR35.
TOTEM takes the guesswork out of status determination. It stores all Status Determination Tests on the system and gives clients an overview of agency payroll payments to ensure agencies are paying workers in accordance with IR35 test results.
What are the penalties for being caught ‘inside’ IR35?
If HMRC determine that tax evasion has taken place and your business didn’t take reasonable care in determining IR35 status, as the fee payer, you could be liable for back payment of tax as well as late payment fines.
Using the TOTEM system is a win-win. TOTEM allows you to eliminate the risk of incorrectly engaging contractors. You can view the engagement status of any contractor on the platform, ensuring an indemnity against IR35.
Using agencies and IR35
By using a third party recruitment agency such as Build Space, you can move the tax liability from your company. Through TOTEM, we provide a complete solution for payroll, contractor management and assessment and IR35 compliance. End users enjoy complete compliance certification while TOTEM fulfils the role of fee payer by physically making a payment to the contractor. And you’ll enjoy savings through real-time cost management and increased back-office efficiencies.
If you’re interested in seeing how TOTEM can manage IR35 for your business, please contact us today to arrange your pilot trial.