A Conversation With Miriam Cox about IR35
Changes to existing IR35 legislation are set to come into effect next year, affecting the private sector of the UK employment market. It is important to have an understanding of the revised legislation to ensure that you will be ready to adhere to the statutory requirements. FastTrack sat down with UK Business Analyst, Miriam Cox, to find out more about these changes, and how you can best prepare yourself for their implementation.
FastTrack: How long have you been with FastTrack?
Miriam: I’ve been with FastTrack for 2 ½ years.
What were you doing before FastTrack?
I was the UK Payroll Product Manager for a global payroll/finance solution.
What interested you about FastTrack?
The challenge of adding UK payroll legislation into FastTrack360 which initially started with Australian legislation.
So Miriam, what is IR35?
The HM Revenue and Customs (HMRC) in the UK introduced what’s called ‘intermediaries legislation’ – commonly known as IR35 – back in April 2000. This legislation is intended to combat tax avoidance by an individual who would be treated as an employee were it not for the fact that they provide their services via a personal services company (PSC). Working in a PSC manner means a person can make substantial tax and National Insurance (NI) savings. If you are a PSC, you would fall outside the IR35 rules.
How does it work?
If the HMRC come and do an audit at your own company, they will decide if the work you have been doing falls inside or outside IR35. If it falls inside IR35, they would calculate a deemed payment saying that you owe tax and national insurance as if you were an employee, because otherwise you were avoiding tax. They will be treating all the income as if you were an employee, and then they will say ‘you owe this money.’ A lot of PSCs have been getting away with tax avoidance, based on this concept of ‘I own my own company, so I don’t have to pay this tax and national insurance that everyone else pay
Who is involved in the process?
The IR35 legislation back in 2000 put the onus on the contractor to decide whether they fell in or out of the legislation. From April 2018, they moved this responsibility away from the contractor, and on to whoever is paying the contractor. If the contractor should be paying tax and National Insurance, then the payer (ie the agency) has to make the tax and National Insurance deductions before they pay the contractor. The agency then has to pay National Insurance contributions, as they would be treated as the employer. It’s a cost to the contractor, and a cost to the agency.
Although this was in 2018, this was only for contractors working in the public sector, not private, for example those working in hospitals, police force, government, etc. As of April 2020, this is going to be rolled out to the private sector. This is, understandably, a major change in process, as then every contractor who owns their own company will have to be assessed. If it is deemed that the contractor falls inside the legislation, then the agency will have to make the necessary deductions as if they were being taxed under PAYE (Pay As You Earn). The agency would then be responsible for sending this information electronically, much like STP, to the HMRC, and also pay over withholding tax.
What is the impact to agencies?
The impact to agencies is very significant. If they are paying the contractor, they are responsible for establishing with the client, the type of work the candidate will be doing and to ensure that the job role is assessed via the HMRC employment status website. If the role is deemed to be inside the IR35 legislation, the candidate will need to be treated as if they were PAYE for tax and national insurance purposes. The agency will also need to prove that this assessment has taken place, because if there is a dispute and the HMRC believes that the candidate should have been deemed as PAYE but was not and there was no proof, the agency will be responsible for paying the tax and national insurance owed.
The second impact is that all agencies need to make sure that their software can calculate PAYE, as it’s possible their software doesn’t accommodate this. Alternatively, the agency can decide to pass on the responsibility of calculating tax and National Insurance by getting the contractor to work under an umbrella company. The umbrella company acts as an employer, and it works out the tax and National Insurance due, and that way they get those deductions made by the umbrella company. That’s an alternative way the agency can deal with this legislation coming in next year.
For those contractors that fall outside IR35 legislation, they would just continue as normal.
How much work is this likely to cause?
A lot. You have to check every single job you get through a client, establish whether this job can be fulfilled by a contractor as a contractor, or if it can be fulfilled as if they were an employee. I’ll give you an example. One of the main criteria is ‘does this person require supervision in order to do the job?’ If they require supervision and instruction to do the job, then that falls within IR35.
How’s the reaction in the UK been?
Mixed. The official response from the HMRC indicates they have raised millions of pounds extra due to this legislation. We are yet to see the full impact of this legislation as it will depend on agencies updating their procedures, their contracts with their contractors, communicating effectively with their clients and the number of disputes raised from contractors and HMRC’s response to the disputes.
How are FastTrack customers placed to deal with the changes?
FastTrack360 has the capability of defining a Deemed Contractor so that it will calculate the statutory deductions as well as ability to change self bill invoices to include the statutory deductions. This makes it really easy for customers to manage the legislative change.
Thanks for your time!