- Tell us about yourself and your area of expertise?
I grew up around Hertfordshire and have lived in St Albans for the past 11 years. I wasn’t sure what I wanted to do when I left school but an opportunity arose to join a well known accountancy practice (Smith & Williamson) as a tax trainee which started me on my path. It was not until I started studying for my professional qualifications that I realised what an interesting and varied area tax is, bringing together elements of law and accountancy.
I was head hunted for my next two roles before I eventually ended up at BDO which was an excellent learning experience but it was there that I realised, that in order to be entrepreneurial, I would need to move out of a large corporate firm so I joined RPG Crouch Chapman who were a long established firm with a great client base but a tax team that needed to be stronger. In the past 5 years I have managed to grow the tax team from 3 people to 11 people with further growth in our sights.
At RPG Crouch Chapman, I believe we have a compelling offering for individuals and businesses of all sizes, we are focused on providing proactive client service and we have invested to bring in experts in all areas of accountancy to provide the SME market with access to big firm expertise but with a smaller firm approach to fees and building long term relationships. Our tax team has been shortlisted in the top 5 firms two years in a row at the British Accountancy awards which supports the hard work we are doing.
2. What is IR35 and who does it affect?
IR35 is legislation aimed at catching individuals that work in a similar way to an employee but do not have PAYE tax deducted on the payments made to them, usually because they have inserted a personal service company between themselves and the hiring company.
A contractor operating through a Limited company but otherwise practically operating as an employee is considered to be a “disguised employee”.
The difference is in the way payments are made in different working arrangements. A salary paid directly to an employee is subject to tax and National Insurance Contributions (NIC) which are handled by the employer under PAYE. In a PSC, the worker receives payments as dividends, which are exempt from NIC. IR35 aims to prevent disguised employees from using this working arrangement to avoid NIC. There will also be a cashflow impact to the contractor as the payments to them will have suffered tax at source
From April 2020, medium and large employers will become liable for determining if the contractor should actually be classed as an employee, failure to correctly identify them and deduct PAYE could result in HMRC asking the hiring company to reimburse them for the underpaid PAYE and NIC.
This effectively shifts all of the risk for determining tax status to the hiring company which dramatically changes the risk profile of using contractors. Although the changes imminently coming in are aimed at medium and large employers it is expected that HMRC will roll this out to small employers shortly afterwards.
You will be impacted if you are:
- A medium or large business that uses contractors.
- A fee payer such as in the recruitment sector.
- A contractor providing your services to a medium or large business
3. Why do you think the changes have been introduced?
Despite IR35 legislation being introduced in April 2000 HMRC have struggled to change the shift away from employment to contracting as employers and employees have seen the tax savings as too attractive and HMRC have historically had limited success in tax cases challenging how and when it should be applied. Previously the risk for underpaid employment taxes was carried by the contractor and his personal service company so the hiring companies were quite happy to continue with the arrangement as if it went wrong it was unlikely they would end up needing to pick up the bill.
Through successfully testing IR35 changes in the public sector and shifting the risk to the organisations paying the contractors HMRC realised that this is a better way of influencing behaviour. HMRC then decided to expand the IR35 changes to the private sector from April 2020. Simultaneously HMRC have taken a more aggressive approach to enforcing and testing the rules through several high profile tax cases targeting celebrities and TV personalities to make the use of contractors seem much less appealing to hiring companies.
4. How can businesses best prepare for IR35?
If you believe that you may be caught by the changes or are not sure, you should carry out a review of your contractor agreements (do you actually have an IR35 compliant agreement in place?) and the realities of each working relationship to determine if the arrangement could be considered employment. We are able to review this and provide you with guidance if you require assistance.
For arrangements that are caught you may need to change the nature of the working relationship to protect your position or start to treat them as an employee if you want to continue the arrangement and mitigate your risk.
5. What are the implications of not complying with the IR35 changes?
Your business could be liable for not just the underpaid employer NIC at 13.8% but all of the employees underpaid income tax and national insurance which could be up to 47% of what they have been paid. HMRC have also been much more willing to pursue interest and significant penalties on top of any underpayment of tax and NIC.
Another common area that hiring companies are also frequently caught out by HMRC on with contractor is the filing of quarterly intermediary reports. Most companies have never heard of these and yet this will be one of the first things HMRC look at to see if they have been completed with penalties of up to £400 per quarter for each missing report.
Please contact me to discuss your circumstances and what action you can take to protect yourself or your business from these changes rmarsh@rpgcc.co.uk or 0207 782 0007
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