Do you have contractors based outside the UK? If so, have you planned for how IR35 will apply to them from April? If not then time is running out – you have a little over 2 months left to get it sorted. A reminder, with effect from 6 April the new regime will apply to large and medium-sized businesses in the private sector who engage contractors. At that point liability for determining the correct employment status of the contractor switches away from the individual and onto the end user. The liability taxes - PAYE and NICs - bites where the contractor is supplying their labour through their own intermediary, usually a PSC, and would be an employee of the end user if engaged directly by them. The reason why this is especially relevant right now is because the pandemic. Covid has forced many contractors to remain abroad and provide their services from overseas and that complicates the tax position. What matters here for HR is not so much understanding the tax laws, rather it’s getting the status determination right. So deciding, accurately, which of your contractors do, and which don’t, fall inside IR35. There are broadly three situations to consider:
1 UK tax resident contractor physically OUTSIDE the UK
2 Non-UK contractor performing services OUTSIDE the UK
3 Non-UK contractor performing services INSIDE the UK
To help understand how IR35 will apply to each of these situations I called on the help of one of our team of tax specialists, Penny Simmons to take use through each one in turn. Penny joined me by video link from London:
Penny Simmons: “Okay, so if you are a business and you are engaging with a contractor through a limited company, because with IR35 we are concerned with those coming in that are engaging through limited companies, whether through an agency or not, if the contractor, so not that the company that they are working through, but if that contractor is UK tax resident, then the reality is you are going to have to consider whether IR35 applies, even if they are physically outside the UK. So maybe they're currently physically outside the UK because of COVID restrictions, but the fact that they are UK tax resident means that you are going to have to consider whether the IR35 rules apply, make that status determination, work out whether they would be an employee for tax purposes if they had engaged directly with the business and, if they had, pay tax.”
Joe Glavina: “Okay, so that's clear Penny. Now onto the second situation. A non-UK contractor performing services OUTSIDE the UK"
Penny Simmons: “Okay, so this is looking at the situation, and we are seeing this more and more, where a business is engaging with a contractor who has actually left the UK, they've left the UK for good, so they are no longer tax resident in the UK. If they're not tax resident in the UK, and they are not performing services for the business inside the UK, so if everything they're doing is outside the UK, then IR35 shouldn't apply and the business shouldn't be having to work out if that contractor would be an employee for tax purposes if they'd engaged directly and not through their personal service company, their limited company.”
Joe Glavina: “Okay, finally Penny, the third situation. A non-UK contractor performing services INSIDE the UK."
Penny Simmons: “Okay, so this is an interesting one. If you are business and you're engaging with a contractor who is not UK tax resident and they generally perform those services outside the UK, then as I've said, you wouldn't be considering whether IR35 applies. If they perform those services inside the UK, so actually if they are in the UK doing something for you, even if they're not UK tax resident, then you would have to consider whether the IR35 rules apply and make that determination. The only case where you may not have to pay tax is if what they're doing inside the UK is what's known as 'merely incidental' to the services that they're performing, but I'm not going to go into that to that now. So generally speaking, even if they're not UK tax resident, if what they're doing is in the UK, then you'd need to have to look at whether the IR35 rules apply.”
Joe Glavina: “Finally Penny, what's the advice to HR in light of all that? The key things they need to be doing before April.?"
Penny Simmons: “The key things that the businesses and their HR team need to be doing is first collating the information as to what is their contractor base, who are their contractors who are potentially within the IR35 rules? So they need to make sure that when they compile that pool of contractors that they do consider those who may be currently outside because of COVID restrictions, but are actually UK tax residents, and once they've done that they're going to need to make sure that they have processes in place to make those employment tax status determinations and put those determinations into what's known as an SDS, a status determination statement, which they have to pass to the contractor and also to the agency if they are engaging those contractors through an agency.”
In recent weeks Penny and the tax team have covered a lot of issues to do with IR35 and the steps to be taken now in readiness for the new legislation coming in April. You can find all of that on the Outlaw website.