IR35 Compliance for Businesses: New Rules You Need to Know

Running a business in the UK often means working with contractors. This brings flexibility, but also the responsibility of IR35 compliance for businesses. How do you know if your contractors are genuinely self-employed or disguised employees? We’ll explain what you need to know to stay compliant and avoid penalties.

This isn’t simply about ticking boxes. It’s about understanding the rules, applying them correctly, and building positive relationships with your contractors.

IR35 primarily affects businesses engaging contractors for tax purposes, ensuring the correct amount of tax is paid.

In sectors where contractors are often integral, understanding off-payroll working rules is vital. Proper compliance safeguards your business from unnecessary risks and ensures smooth operations.

Let’s analyse the topic ‘IR35 compliance for businesses’ in detail. 

What is IR35?

IR35, officially known as the off-payroll working rules, was introduced in 2000 to address “disguised employment”. This occurs when contractors work like employees but pay less income tax and employer national insurance contributions through their limited companies.

The rules aim to create a level playing field. They intend that contractors working similarly to employees pay similar tax and National Insurance.

Why IR35 compliance matters for businesses

Non-compliance with the off-payroll working rules of IR35 carries significant risks. HMRC can investigate up to six years back, potentially leading to back taxes, interest, and penalties.

Penalties can reach up to 100% of the unpaid tax. A 2023 government consultation explored calculating tax liabilities in non-compliance cases, highlighting the continuing focus on these rules.

Correct IR35 compliance protects your company’s finances and reputation. A clear IR35 process can also attract skilled contractors who value transparency. This ensures a smooth supply chain of talent.

Determining IR35 status: Key tests

Determining IR35 status involves a few key status tests. These aren’t strict rules but guidelines for understanding the true nature of the working relationship. The contract reviews should examine control, substitution, and mutuality of obligation.

Control

Who decides how, when, and where the work is done? If the business controls these aspects, it suggests an inside IR35 determination.

Giving a contractor the autonomy to make these decisions often signifies an outside IR35 status. The degree of control the client exercises is one of the most influential key factors for this status test.

Substitution

Can the contractor send a substitute to complete the work? A genuine right of substitution suggests outside IR35.

Requiring the contractor to personally do all of the contracted work is indicative of inside IR35 status. An important note is if the contractor provides services or provides service can affect status. Also take note of where the contractor is working. Whether the contractor is working at the client’s premises or at another location should be considered.

Mutuality of obligation

Is there a continuous expectation of work from the client and an obligation for the contractor to accept it? This ongoing arrangement suggests inside IR35.

This considers whether there is an ongoing mutual obligation between the parties for work to be provided and accepted. Mutuality of obligation looks for an employer/employee type relationship which means a contract would likely be inside IR35.

The employment status regarding length of a notice period or the need for professional indemnity also points to inside IR35.

IR35 compliance for businesses: A step-by-step guide

1. Assess each contract: Examine the written terms and actual working practices against the key tests. Do not rely solely on the contract wording; the reality of the working relationship is most important.
   
   
2. Seek expert help: If you’re unsure, consult with IR35 specialists. They can provide an objective assessment of your contracts, working practices and deemed payments.
   
   Consider if a limited company contractor, working through a personal service company and operating as a sole responsibility is undertaking a contract personally or can send another company contractor or other personnel. Reach out to Sleek – a reliable platform for expert help your business needs.
   
   
3. Issue a Status Determination Statement (SDS): Communicate the IR35 status clearly to the contractor, explaining the reasoning. Transparency is crucial.
   
   
4. Keep records: Document your assessments, consultations, and SDSs. This demonstrates due diligence to HMRC.
   
   
5. Regularly review: Working practices and contracts can change. Reassess IR35 status periodically, or whenever anything significant changes.

The small companies exemption

Small businesses under the Companies Act 2006 are exempt. The contractor determines their own IR35 status, not the client. However, it is still useful to be aware of the legislation so both the small business and its limited company contractors are aligned and educated on IR35, otherwise, they may incur unnecessary penalties if the client is in the public sector.

Working with agencies

Using a recruitment agency can complicate matters. If the agency is the fee-payer, they handle tax and National Insurance deductions.

Clearly defined roles and responsibilities are essential. Though the agency is often the fee payer, the end client must still exercise reasonable care in determining a worker’s IR35 status according to recent off-payroll rule reforms. This impacts agency workers, so you should deduct income tax as necessary.

Easily stay compliant with expert assistance from Sleek: 

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With over 450,000 entrepreneurs like you successfully assisted, our expertise ensures your limited company is set up correctly and complies with all legal requirements.

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Whether you’re a sole trader, limited company, contractor, or startup, we have tailored services to meet your business needs.

Conclusion

IR35 compliance for businesses may appear complex. However, with a structured approach and by getting to grips with the key status tests such as Control, Substitution, and Mutuality of Obligation, it is possible to manage this tax legislation appropriately.

Understanding the rules and getting expert advice where needed makes IR35 compliance less daunting. It’s a chance to build stronger relationships with contractors and ensure your company’s financial stability.

For businesses in the financial services sector, IR35 compliance is especially significant due to the sector’s reliance on contractors for specialised roles. Ensuring adherence to the off-payroll working rules reduces the risk of financial penalties and protects your company from allegations of tax avoidance.

Small companies, too, must ensure they understand how these rules apply to them. Even if the rules apply differently based on company size, overlooking compliance can expose small firms to financial risk and reputational damage. Seeking expert guidance is a practical step towards avoiding costly tax issues and securing long-term stability.