WARNING: What you must know about your contractors before April 2020

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.

If you think this article is useful and you would like to know more,  please join our mailing list, or contact us for further guidance.

The Facts You Should Know About IR35 Tax Rules and Your Contract Workers

If you have had difficulty in recruiting skilled staff to undertake specific projects, then you may  have turned to the contract world.  In some industries the way to ease recruitment has been to use contract workers.  This is particularly the case in the IT world.  Technology changes fast and it is difficult and costly to keep trained employees.

I have worked in Human Resources in both the public sector and private sector for some years. So I know the difficulties employers face when it comes to recruiting technologically adept staff.

IR35 Tax Rules are coming to your contractor workers soon

The UK government is currently consulting on the intention to introduce IR35 tax rules to the private sector from April 2020.   These rules have applied in the public sector from 2017.  But many private sector employers are unaware of the rules or the implications for their business.

In a nutshell, the proposal is that private sector employers who use contract workers will become responsible for deciding whether to deduct tax and national insurance from those contractors, via payroll.  They would be classified as falling within IR35 tax rules. This would effectively give the contractors employment status.  They would be able to claim benefits enjoyed by other employees, such as holiday entitlement, sick pay, redundancy pay, etc.  They would be taxed as an employee and it would be your responsibility as an employer to deduct that tax.

What have we learnt from the public sector?

This legislation has been in effect in the public sector since 2017.  It was brought in to combat tax avoidance by contract workers.  If they  were providing their services via an intermediary (often a limited company) then they would be subject to different tax rules.  They might otherwise be taxed as an employee.   There have been some high-profile and costly cases to determine whether or not an individual is considered an employee and  what the costs of that decision are for the employer.

Contractors have been widely used in recent years as a way to circumnavigate recruitment difficulties.  This has been particularly prevalent in the IT industry, where there is an ever-changing skills requirement for projects.  There is a need for existing employees  to learn new skills regularly, in technology which may only turn out to be short-lived.  This has been prohibitive for business in terms of cost and capacity.   In such a fast-changing environment,  it has proved beneficial and cost-effective to use contractors.

What do I need to do about IR35 for my staff?

But from April 2020 in the UK, the onus is likely to fall on private sector employers to make tax decisions regarding these contract workers.   If your business relies on contractors, then you should start to consult with them now about these proposed changes.

There are various ways to determine employment status.  You will need to consider what applies to your contractors and what does not.

Some of the considerations are:

  • Do  you require your contractors to be in a set workplace at a set time.  Do you expect a set number of hours of work per week? Or can they work the hours they choose, in the place they choose to do it.  Do they have to complete a time sheet, or just raise an invoice for the work they have done?
  • Do you provide equipment (eg. computers) and do you expect the contractors to use that  equipment? Or do you allow – or even expect –  them to provide their own equipment?
  • Do you expect contractors to undertake training provided by your company for its employees?
  • Are your contract workers free to take time off whenever they want to?
  • Do you insist that they take a specific amount of time as holiday?
  • If they are not available for work (for example if they are sick), do you expect –  or allow  – your contractors to provide a substitute to do the work?
  • Do you expect contractors to work exclusively for you, or are they free to provide services for other companies as well?
  • Do you provide transport or uniforms or accommodation for contractors?
  • Can they make use of subsidised canteens or gym facilities, etc (ie. employee benefits)?

Some of your answers to these questions may be rather vague, or dependant on such things as security considerations.  The answers  will not absolutely guarantee whether or not someone is considered to be an employee.  But they are all things which can help to determine the true nature of the relationship.

 Why do I need to think about IR35?

The government consultation goes on until the end of May 2019.  Expectations on employers will be more clear once the consultation is finished.  However,  it is very likely that you will be asked to decide on whether your workers are truly self-employed or should be taxed as employees.

It is worth beginning these discussions now.  You will then be able to make an informed decision about whether or not to deduct tax from payroll and offer employee benefits from April 2020.

Start discussions with your contractors so that they know that you are aware of the implications. You can be sure they are nervous about it themselves.   A frank discussion will help you both to prepare for any tax changes and decide how best to deal with any impact on either the individuals or the business.    It won’t do your reputation as a caring employer any harm either.

If you think this article is useful and you would like to know more,  please join our mailing list, or contact us for further guidance.