Please note – we are not tax accountants – BUT this is something that businesses, including larger law firms, need to be aware of. Get appropriate tax advice.
IR35 – a bear trap for companies hiring external help. Basically, the Inland Revenue wants to ensure that the state is not being done out of taxes through the use of a service company instead of the staff being regular employees, paying PAYE etc. So for some years now, if external help has been hired by an arm of the state (including local government, the NHS etc), the hiring party (or end client as HMRC calls them, eg, NHS) has to make a determination as to whether the hired help is an employee. If so, the end client needs to pay employers NI etc. If they say that they are not an employee and HMRC decide they got it wrong the end client will need to pay the missing tax to HMRC.
On 6th April 2020 this regime is extended to larger private companies hiring external help. By larger they mean companies meeting 2 of the following criteria:
a) you have an annual turnover of more than £10.2 million
b) you have a balance sheet total of more than £5.1 million
c) you have more than 50 employees
Several factors influence whether HMRC will regard the external help as an employee; such things as
HMRC has created an easy to use tool to check if an arrangement is likely to fall foul of IR35. Crucially, it is anonymised, so one may check out a scenario before entering into a contract. Here is a link to it: https://www.tax.service.gov.uk/check-employment-status-for-tax/disclaimer
A lot of organisations will need to consider how they work very carefully. This will even affect mid-sized Accountancy & Law firms, given the criteria above. Many law firms hire ‘Consultant’ Lawyers. It’s a way of getting experienced talent in to cover a need within the business. Typically, the consultant solicitor will have their own company through which he/she trades. If they are there long term, as they are most likely to just be working for that firm, there is a strong likelihood that they will be caught by IR35 after 6th April 2020. This is a shame, as the arrangement allows flexibility within the workplace that suits both sides. Feel free to contact us to talk this through, as we might have a solution.
Here are some useful links to the rules:
Understanding off-payroll working (IR35)
Who the changes apply to:
What the April 2020 changes are: