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.
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.
The Government initially stated 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. However, in light of the coronavirus pandemic it was announced by the government that the extension of IR35 to medium and large companies in the private sector was put BACK a year, to 6 April 2021.
From 6 April 2021, medium and large-size private sector companies will become responsible for deciding if the rules apply. If a worker provides services to a small client outside the public sector, the worker’s intermediary is responsible for deciding the worker’s employment status and if the rules apply.
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 that took effect on 6 April 2021 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 should have already take steps to assess their status and change it where the provisions of IR35 are met. If you will need to act now to avoid a potential liability in the future.
What will the changes relate to?
Previously if your business hired an individual who stated that they were exempt from IR35, then you would have no obligation to deduct tax or national insurance. Since the reforms as of 6 April 2021 IR35 has moved the responsibility to the company, you as a business will have the responsibility of determining the tax status of the individual from the worker to the company.
How do I know whether someone falls within IR35 or not?
The government has introduced an assessment tool known as the CEST (Check Employment Status for tax) tool. The benefit of the CEST tool is that if you use this to determine the tax status of an individual and do so honestly the government have stated that they will stand behind the outcome of that assessment and so this will act as evidence to prevent a fine in the future.
The CEST tool will ask you a series of question and at the end it will confirm if the individual falls within IR35 or not. You may on occasion receive an indication that the outcome is inconclusive. These relationships will need to be further investigation but you should be aware that the determination of tax status can be a complex question and so you may want to seek specialist advice to assist you.
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 in the Employment Tribunal.
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 have affected your business you should do so without any further delays, give a member of our employment team a call on 01254 828300 for more advice.