What is IR35?
IR35 is a piece of complex tax legislation that was introduced in 2000 to target a tax loophole that HMRC considered may result in an underpayment of tax contributions. The legislation was designed to make sure that an individual who works like an employee, but through their own limited company, pays broadly the same Income Tax and National Insurance contributions as those who are employed directly.
When will any proposed changes come into effect?
When IR35 was introduced in 2000 the onus was placed on the individual to assess their own tax status but HMRC have been introducing changes to the legislation over the last few years. In April 2017 businesses operating within the public sector saw the burden shift to them to assess the ‘employment status’ of an individual for tax purposes. Thus, if a public sector business assessed an individual who claimed to be self-employed as falling within IR35 they were required to notify the individual and confirm that deductions would be made for Income Tax and National Insurance contributions.
As of 6 April 2020, the burden for assessing employment status in the private sector will shift to the ‘end user’ i.e. the business engaging the self-employed individual whether directly or through an intermediary business.
It is anticipated that the changes will bring in £3.1 billion in additional tax revenues in the next 4 years. This is clearly across the broad spectrum of business sectors and not solely within the transport sector however, it considered that the use of self-employed individuals is prevalent with the transport sector and this will need to be addressed in order to remain compliant with tax legislation.
Will this affect me as an operator?
The changes due to take effect on 6 April 2020 apply to medium and large business only and there is currently a small company exemption that will apply. A medium and large business is defined as a business that meets two of the following three criteria:
Businesses falling within the above criteria will therefore need to take control of determining an individual’s employment status for tax purposes and so if you engage individuals either directly through a Personal Service Company (PSC) and/or another form of intermediary company you will need to act now.
What will the changes relate to?
On 7 February 2020 HMRC announced that the changes to IR35 will relate to services provided on or after 6 April 2020. Previously it had been suggested that the changes would relate to payments on or after 6 April 2020. Whilst this only seems like a subtle difference it means that business have until 6 April 2020 to assess the status and implement change rather than face a potential liability for non-compliance for work undertaken prior to implementation of the legislation.
What does this mean for small businesses?
Whilst small businesses are exempt from the legislative changes this does not mean that they are exempt from the effects of IR35 or the use of self-employed individuals. There have been many cases over the last few years where transport operators have been targeted for use of self-employed drivers, including the employment tribunal decisions in the Uber and Hermes cases. Whilst these decisions are not always concerned with tax liabilities they are telling as to how the role of the self-employed driver should be viewed by operators and the pitfalls they may face. It is not only HMRC who can investigate employment status but the individuals themselves who could seek to claim against the operator.
HMRC have identified a concern within the transport industry, and in particular with haulage operators, utilising the self-employed individuals or intermediary businesses and have suggested for a number of years that it would be rare for a driver to be genuinely self-employed unless they are an owner driver. In essence to be self-employed they should be in business on their own account and bear the responsibility for the success or failure of that business. Having identified a perceived reliance on the use of self-employed drivers HMRC have written to the traffic commissioners to assist in identifying businesses who fail to comply. The traffic commissioner considers the use of self-employed drivers, who cannot be shown to be genuinely self-employed, as unfair competition and a potential issue of repute which could impact on an operators O-Licence.
What can I do about it?
Operators both large and small should be reviewing the status of those individuals they engage whether that is directly engaging the individual or through any form of limited company or agency and seeking to implement change. If an operator consider they are affected by IR35 and are not clear about how this may affect your business, give a member of our employment team a call on 01254 828300 for more advice.