QUESTION: I run an events company and have been advised that I may have a PAYE obligation for sub-contractors that I regularly engage with. Can you explain how they would be classed as employees and what I need to be doing to be compliant?
ANSWER: Off-payroll working, sometimes referred to as IR35, relates to a set of tax avoidance rules that crack down on disguised employment. If a sub-contractor’s work falls within its scope, you should treat as an employee for tax purposes, even though they’re registered as self-employed.
Contractors who work through their limited company or sole-trade enjoy a level of tax efficiency. While they don’t usually get employee benefits (like holiday and sick pay), they have flexibility and control over their work.
The benefit for employers hiring workers in this way is that they don’t have to pay employers’ national insurance contributions or give contractors employee benefits.
The above benefits for both the contractors and employers, saw a rise in number of contractors. The government believed many contractors weren’t genuinely self-employed, but simply used this to pay less tax and therefore introduced additional rules.
In general, IR35 won’t apply if the contract is for services rather than employment. There is no one test that will determine whether your sub-contractor is your employee or works on a self-employed basis, rather there are several factors that need to be considered to build a complete picture of the working relationship. You should see how each contract specifically deals with the following principles:
• Supervision, direction, control;
• Provision of equipment;
• Substitution;
• Mutuality of obligation;
• The nature of the client relationship.
In your industry it makes sense not to retain a large workforce on the payroll given the demand is not steady throughout the year and you would be unable to provide employment year round. But do you find yourself engaging with the same sub-contractors as the need arises, are they obliged to accept the work offered and can they send a substitution in their place?
Many find the legislation complicated to understand. Even HMRC seems to struggle – its record on successfully fighting IR35 cases at tribunal is patchy, you might have seen recent cases reported for high profile TV personalities.
Where your sub-contractors trade as non-corporate bodies, i.e. sole-traders and partnerships, it is always your responsibility to determine whether an employee relationship exists requiring PAYE to be operated on payments (i.e. income tax and national insurance burden).
Previously corporate contractors were responsible for determining whether an employee relationship existed and apply PAYE themselves if appropriate. However, from 6th April 2021 this responsibility was pushed onto the engaging company provided they are not classed as small. A small business would meet two of the following criteria:
• Annual turnover of no more than £10.2 million;
• Balance sheet total of no more than £5.1 million;
• No more than 50 employees.
If you’re a medium-sized or large business, contracting working out, you will be responsible for assessing the contractor’s employment status, not the contractor. If you are a small business, this responsibility remains with the sub-contractor.
Companies are required to issue status determinations to these workers, giving the reasons behind arriving at the conclusion, allowing them to dispute the employee status decision if they disagree with it. There is also a requirement to periodically review existing sub-contractors to ensure that changes in the relationship over time does not alter their status.
HMRC had advised that there would be an initial ‘soft landing’ approach to these reforms, but with that ending, it is more vital than ever that businesses are aware of their responsibilities and compliant with the rules.
:: KellyAnne Murtagh (k.murtagh@fpmaab.com) is senior manager at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
