Keeping across various changes introduced by HMRC can be challenging. This year we see the implementation of Making Tax Digital (MTD) plus there are also changes to the IR35 regulations. Keeping in close contact with your accountancy firm to ensure you are ‘doing the right thing’ is important. We’ve touched on MTD in other articles so here I wanted to talk about IR35 and if you employ freelancers or contractors you need to take note!
IR35 is tax regulation that was brought into prevent workers and employers avoiding tax. In April 2020 these rules are set to change in the commercial sector.
IR35 was originally introduced in the year 2000 and is relevant where services are provided by contractors through an ‘intermediary’ (in other words an organisation like a limited company) but where they would normally be an employee if the ‘intermediary’ was not used. This usually occurs where there might be a freelancer or contractor who has set up as a limited company but only provides services to one partner organisation, so they are acting more like an employee. IR35 affects these staff as it means they needed to pay tax and National Insurance contributions just as if they were employed. However, this is costly to these contractors, as essentially they end up ‘doubling-up’ on some elements of taxation.
Therefore, from April 2020, the new Off-Payroll Tax will replace IR35. The new Off-Payroll Tax legislation will be used to identify ‘deemed employment’ status. The essence of the change is that the responsibility for assessing contractual engagmenets now shifts from the contractor to the employer or client. Essentially, HMRC is looking for ‘disguised’ employees so genuinly self-employed contractors and their clients should have nothing to fear but contracts and the nature of their tasks need to reflect the correct working relationship. For example, a genuine contractor can turn down work, and won’t have paid holidays unlike an employee.
So if you are a franchisor or franchisee employing contractors it will be your responsibility to do a CEST test – a check for employment status for tax for each contractor you employ. A blanket approach is unacceptable, so each individual contractor will need to be reviewed. As the employer, if the contractor is deemed as an employee, you will now be liable for some tax liabilities including Employers National Insurance at 13.8% so it is important to clarify the situation correctly.
There are actions that can be taken, contracts can be reviewed and clarified or the contractors can work through umbrella organisations. To comply with the new legislation, if you hire contractors or freelancers it will become your responsiliity to review each relationship and act accordingly.
One final note is that the Government are currently undertaking a review of the new rules to ensure they can be implemented as smoothly as possible. This may result in some minor changes to the proposed legislation. The review will be complete and we will know the outcome in mid-February.
The new rules will be the biggest change to the IR35 regulation since it was introduced 20 years ago. At d&t we are always happy to provide advice about tax for our clients so if you are a franchisor or franchisee worried about these new regulations then please contact us and we can help you clarifiy contracts and ensure your franchise remains compliant.
For furhter information please see: www.team-dt.com
Originally published in Franchise World, March 2020