IR35 legislation is changing for users of self-employed contractors who are medium or large companies in the private sector.
The IR35 changes allow for liabilities to more easily flow through the supply chain. The decision on employed or self-employed status will shift from the intermediary (usually a personal service company/contractor) to the clients that are using the services of the intermediary/contractor. Once a decision has been reached as to status, the end user client must confirm this by providing a “Status Determination Statement” (SDS) to the contractor and any agency or other provider in the supply chain.
If HMRC determine that a contractor is inside IR35 but has been treated as being outside of IR35, there will have been an underpayment of tax and national insurance on the services they have provided.
Tax Liabilities
If the end user has failed to issue a SDS or has failed to use reasonable care in preparing the SDS or has failed to deal with an appeal or challenge in respect of the SDS, they will be the responsible party. Where the fee payer has received a compliant SDS but simply doesn’t pay the tax and NICs to HMRC, they will be responsible; however, if HMRC can’t recover this from the fee payer they can pursue this from the first entity in the supply chain and ultimately the end user.
In any case, HMRC will issue a determination in respect of the unpaid tax and national insurance, as well as any late payment fines and interest. They also have the discretion to issue a penalty and so the financial implications of getting this wrong could be grave.
Employment Liabilities
Where a “contractor” is deemed to be an employee for tax purposes, he/she may assert that they are also an employee or worker for employment purposes and, pursue a number of additional rights such as holiday pay and sick pay in the employment tribunal. Defending such a claim would be time-consuming and costly, and could open the floodgates, if the claims were successful, for any other individuals engaged in the same way.
Other Implications
Reputational damage: if HMRC concludes that an organisation has breached IR35 legislation, there may be reluctance from end users and contractors to engage with them going forwards; they may choose to work with competitors instead.
Sponsor licence: an organisation that has a sponsor licence will be aware its numerous ongoing duties, one of which is complying with its employment law obligations; failure to do so may, for example through non-payment of tax and national insurance, however, result in a revocation of their licence.
Contractual breaches: as well as the liabilities set out above, an organisation may also be liable for warranties and indemnities contained in contracts or terms and conditions that they have signed up to.
With a wealth of experience in this area, the recruitment team at Brabners can help you take the necessary steps to ensure your business is IR35 ready and compliant by the time the new rules are implemented. Should you wish to get in touch with us, please contact Heena Kapadi.
