IR35 is a crucial piece of legislation that impacts large international companies employing workers in the UK.
This law specifically addresses the issue of ‘disguised employment’, aiming to combat tax evasion by both workers and their employers.
IR35 does not apply to smaller businesses—those with a turnover of £10.2 million or less, or a balance sheet of under £5.1 million.
Therefore, this article will concentrate on the medium-to-large businesses that are subject to IR35.
The essence of IR35 is to ensure that workers, who might be employed through their own companies but effectively function as direct employees, are taxed in the same way as regular employees.
For any overseas business with UK-based staff, understanding and adhering to IR35 is not just a legal necessity but also crucial to avoiding hefty penalties and additional tax liabilities.
What does IR35 mean for your business?
To ascertain whether IR35 applies to your arrangements, you need to examine several key factors:
- The degree of control you have over the worker
- Whether the worker can send a substitute in their place
- The expectation of ongoing work between the parties
HM Revenue & Customs (HMRC) provides a digital tool, the CEST (Check Employment Status for Tax), to help employers determine if their work arrangements fall within the scope of IR35.
However, consulting with tax experts who specialise in UK employment tax law is highly recommended to navigate this complex area.
Employer responsibilities under IR35
As an international employer, if you fall under the category of a ‘deemed employer’ in the UK, you are responsible for Withholding Taxes and National Insurance Contributions – just as any other domestic employer would be.
A deemed employer in the context of IR35, is usually the entity in the supply chain that pays the worker’s personal service company.
Neglecting these responsibilities can lead to severe penalties, including substantial back taxes and a strained relationship with HMRC.
Additionally, it is important to note that the responsibility of providing a status determination for every contract rests with the employer.
This determination must accurately reflect the real working relationship to prevent any misclassification under IR35 rules.
Incorrect determinations can pose significant risks, including potential legal action.
In cases where workers or employers disagree with a status determination, an appeals process is available.
This process allows for a review of the determination, giving both parties a chance to present evidence and argue their position before a final decision is made.
Recent changes to IR35
Effective from 6 April 2024, a significant change in the treatment of IR35 liabilities has been implemented.
Businesses will no longer face ‘double taxation’ when settling an IR35 liability for incorrect status determinations.
Previously, this issue led to disproportionately high tax bills due to HMRC not offsetting the taxes already paid by the contractor.
The new measure ensures that any taxes paid by the contractor are automatically accounted for, thus rectifying the double taxation issue and providing a fairer assessment of tax liabilities.
Best practices for managing IR35 compliance
While managing IR35 compliance may seem daunting, maintaining rigorous records and keeping abreast of each contract’s specifics are key.
Employers are advised to:
- Stay organised with clear and concise record-keeping
- Regularly review contract terms and working practices
- Seek ongoing advice from tax professionals experienced in IR35 and UK tax laws
It is essential to note that these responsibilities and adjustments apply predominantly to larger businesses, as they are typically the ones affected by these regulations.
Some companies opt to work with umbrella companies, which act as the employer on record and handle all tax-related responsibilities.
While this can simplify tax matters, it’s crucial to consult with your tax adviser to determine if this approach suits your business needs.
At the heart of effective IR35 compliance is the engagement of skilled international tax advisers.
We can not only ensure adherence to UK laws but also help optimise your tax obligations to ensure you neither overpay nor underpay.
Our team of international tax experts is ready to assist you with all your payroll and tax compliance queries.