Earlier this year, I wrote an article about the UK Government’s consultation on the introduction of IR35 tax rules. This is in relation to contractors in the private sector. If you use contractors in your workplace and you are a medium or large sized company, then you need to prepare for these changes.
Many employers remain unaware of these changes. If you do know about the changes, have you discussed them with your contractors? Have you agreed on their taxable status?
The Government announced in July that the consultation had finished and changes would be effective from April 2020. Tax and National Insurance payments for contractors will become your responsibility.
It is best to avoid the blanket payment approach
These rules were brought in for the public sector back in 2017. Most public sector employers decided to tax their contractors as employees. But they did not give those contractors the other benefits of employment. As a result of this approach, many contractors stopped working in the public sector. Public sector employers now find it much harder to attract contractors. Where they do still use contractors, they often have to pay a huge amount more than before.
What are the tests which prove whether or not a contract worker is genuinely self-employed?
Unfortunately for employers (and contractors), the only real test is in employment tribunal. There have been several high profile cases about employment status and there are likely to be more.
There is no hard-and-fast rule which shows that one person is genuinely self-employed. But there are some indicators which the Courts will consider in these cases. So it would be wise for employers to consult with their contractors about these issues. This will help to determine how their tax should be calculated. Not all of these indicators apply to every contractor. But they can give a guide to the true status of employment.
Some of the factors
- Can the individual work at times and from a location to suit themselves? Or do you require them to be at a specific location, at specific times. Do you require a set number of hours? If so, then that would indicate that you are their employer, not their client.
- Does the individual use their own equipment and tools? Or do you expect them to use tools and equipment which belong to your company? Again, this would indicate they are employed by you. If you are happy for them to use their own tools, this is another indication that they are not your employee.
- If you provide skills training, this might indicate they are considered an employee. Especially if you require them to undertake such training. A true contractor (supplier) should already be trained and skilled in what you need. So it should not be necessary to provide any skills training for them.
- Is there an expectation that you will continue to provide work once the specific job has been completed? Alternatively, are they expected to do work for you, other than what is specified in the contract? Or do you expect them to continue to be available for work for you once the project is done? Any of these things would suggest “mutual obligation” between you. This indicates that they are an employee.
- What happens if they are unavailable (off sick or on holiday)? Do you allow them to provide a substitute to do the work while they are off?
- Are your contractors free to do work for other companies at the same time as they work for you?
- Do you provide transport, uniforms or other “employee benefits” for your contractors? For example, can they use a company subsidised gym or restaurant?
This is not an absolute or exact science
The answers to these questions can help you and your contractors decide on the fair way to deduct tax and National Insurance. Should it become clear that they are an employee, then you may need to offer employment terms and conditions and benefits. If you do not do so, then it is unlikely that the individual will be prepared to continue to work for you.
Your discussions – and their answers – might indicate that they are a true contractor or “supplier of services”. This will not guarantee that HMRC does not investigate further, of course. But your records of these discussions and their answers will help to show that you have investigated their employee status and have valid reasons for your decision.
Discussions sooner rather than later
If you want to avoid last minute decisions about the status of your contractors, then you need to start these consultations now. Otherwise you might face significant disruption and loss of talent at the last minute. Many public sector organisations are still facing skills shortages. Some are finding it hard to attract and retain contract workers.
The Government has developed a tool to help businesses to decide on the tax status of their employees. There has been some criticism of this Check Employment Status For Tax tool, but it may help employers and their contractors to make an informed decision.