Most business owners will have heard about the IR35 ‘off-payroll’ working rules, which previously applied only to public sector organisations but from April next year will also spread to the private sector. But although there’s a small business exemption, you may still have responsibilities. Here are six key questions to identify what your small business needs to do.
What is IR35?
The IR35 system applies if there is a worker providing services through an ‘intermediary’, usually their own limited company, but the nature of the work means that if they were contracted directly by the organisation they are working for, they would be classed as an employee.
The system is designed to ‘catch’ those people and ensure the right tax and National Insurance contributions are made. The way it works is that the client organisation has to make a ‘determination’ about the worker’s status, and if the determination is that the IR35 rules do apply, tax and NI must be deducted.
How does it work?
End-user client organisations will be responsible for making a ‘determination’ about the status of the workers they engage. There is an HMRC tool available for helping with this. Once the client has made the determination, that has to be passed on to the worker directly and to the organisation the client contracts with, and so on down the supply chain. The organisation that pays the worker’s intermediary the fees is then responsible for tax and NI contributions.
Who does it apply to?
The system currently only applies to public sector organisations, however from 6 April 2020, medium and large-sized private sector client organisations will have to work under the system as well, and will also become responsible for determining whether the off-payroll rules apply to workers they are using.
Small employers (employing no more than 50 staff) will not have responsibility for determining the status of workers they are engaging, so if you are a small business which is engaging workers through their own intermediary companies, they will remain responsible for determining their status and for tax and NI contributions.
However, the small business exemption only applies if the small business is the end-user client. If you are small business involved in the supply chain as the ‘fee-payer’, the IR35 system will affect you, and you will have to apply the rules even though you haven’t had to make a determination.
How do I know whether my business is a ‘fee-payer’?
The ‘fee-payer’ will be the organisation one above the worker’s intermediary company in the supply chain. So if you provide workers to a large client, and pay those workers to their own limited companies, you are likely to be the fee-payer.
What does the fee-payer have to do?
As the fee-payer you should be given a ‘determination’ by the client or other entity immediately above you in the supply chain in respect of those workers. If you don’t receive this, you can proceed as normal and pay fees without tax deductions, although you should enquire why you have not received this.
If the determination indicates that the IR35 rules do apply, you will need to make tax and National Insurance deductions from the ‘deemed direct payment’ before paying the worker. The ‘deemed direct payment’ is the fee due to the worker’s company, after deducting any VAT, any tax-deductible expenses and any direct costs of materials used to provide the services.
Once you’ve identified the ‘deemed direct payment’ you will need to make deductions in respect of tax and National Insurance, pay employer’s National Insurance contributions, and will need to report all this to HMRC through Real Time Information just as you do with other workers you employ.
What about other employment rights?
Even if the determination of the worker’s status in respect of IR35 is that the rules do apply, this does not mean you also have to pay the worker holiday pay, pension payments or other statutory payments.
If you’re not sure whether the rules will apply to you or would like some guidance on employment status, do get in touch.