IR35 is in the news again with a proposed reform of the infamous legislation threatening to expose companies that are “avoiding” paying the right amount of tax.
Should the changes be brought in, it will now be considered a new corporate criminal evasion offence if businesses don’t ensure their contractors are paying tax properly.
So, what is IR35?
IR35 is a tax law designed to prevent contractors from becoming “disguised employees”.
Contractors outside the scope of IR35 are known for getting much more attractive tax reliefs than normal company employees. Because of this, HMRC has had trouble in the past with, as they say, people leaving their desk on a Friday as an employee, then returning the next Monday morning as a contractor doing the exact same job for the exact same people.
Contractors pay less in tax than an employee. A company does not have to pay National Insurance Employers’ Contributions on contractor income. HMRC doesn’t like losing out on what it thinks is theirs.
So, HMRC judge client-contractor cases by creating “hypothetical contracts” between the two parties. They investigate the nature of the work carried out by the contractor and their relationship to the client to see if it appears to be that of an employer and an employee rather than a contractor and client.
If HMRC decide you are “within the scope of IR35”, you’ll be forced to pay all taxes HMRC deems to have been avoided plus hefty fines and charges.
What has been proposed?
The suggested changes mean that, rather than HMRC simply interpreting this relationship, contractors should be able to expose their client if their client has been outright dishonest, i.e. lying directly to HMRC.
Many businesses prefer to hire contractors for certain roles as it saves a lot of money in employment related benefits, sick days, holidays, training, and other expenses.
Ian Hyde of solicitors’ firm Pinsent Masons told ContractorUK that “turning a blind eye to contractors deliberately misrepresenting their position”, whether this is though HMRC’s employment status tool or by purposefully falsifying documents to bend the truth, the company essentially agrees to engaging the worker without deducing tax.
He says this “could amount to facilitating tax evasion” – a criminal offence.
Someone other than the company’s direct staff can also expose the company for facilitating the evasion of tax however, thanks to the ‘associated persons’ clause of IR35, they could potentially risk shooting themselves in the foot at the same time.
Even recruiters that place a candidate in a contractor role, knowing or believing the nature of the job to be that of an employee, could be at risk with the new rules in place.
Facilitating the evasion of tax
Back in September 2017, it became a corporate criminal offence for business to fail to prevent the criminal facilitation of tax evasion. You can read the government guidance on the legislation here.
Stage one of a tax evasion facilitation offence is when the taxpayer – in this case, the contractor – is found to “be knowingly concerned in” tax evasion. Stage two concerns the contractor’s client being an “associated person” in the crime.
It is already against the law for someone to deliberately and dishonestly facilitate another person fraudulently evading tax. For this to be a corporate offence, there must be some kind of criminal facilitation of the taxpayer’s evasion by their client, bank, accountant, or lawyer.
Finally, the business could also be charged with committing a strict liability offence as a criminal facilitation act if they failed to prevent tax evasion in the first place.
“The use of agencies is a particular concern and businesses should insist on agencies taking their own steps to prevent the facilitation of evasion,” Mr Hyde said.
What this means is, if your company works with contractors, you must have reasonable prevention procedures in order to stop them from evading tax.
What does this mean for you?
“As we are talking about criminal offences, there would be potential prosecutions of the individuals involved and for the end-client company, the risk of a corporate prosecution – which could carry a fine for the company – but worse than this, the PR implications and being barred from government contracts,” Hyde said.
In the past, personal service companies may have turned a blind eye as to whether their worker would be deemed a contractor under IR35, since they would be responsible for paying Employer’s National Insurance Contributions if the worker was an employee.
The new offence proposed by HMRC will concern both individuals and companies responsible for assessing IR35 status. It is possible that you may even be required to take those caught by IR35 onto your payroll to avoid a criminal charge should your contractors be found to be evading tax.
Hyde added: “End-clients need policies and procedures in place to protect them from the risks of a criminal offence in case a ‘rogue’ employee is facilitating evasion of tax by the businesses’ contractors or customers.”
Let us help
If you work with contractors and are unsure whether you could be caught by the new IR35 rules, speak to SMART team today. We’ll be able to talk you through your tax liabilities as an employer and a client, and help with what you can do to protect your company from criminal charges. Call us today on 01202 577500 to speak to the experts or email firstname.lastname@example.org