This year the IR35 guidelines came into force. IR35 is a set of guidelines that employers must now follow when engaging ‘intermediaries’ for goods and services. These guidelines have been introduced by the government to tighten the controls around employer responsibilities, ensuring the correct application of Pay as you Earn (PAYE) and National insurance(NI) contributions.
The guidelines relate to the decision which must be made as to whether the individual is an employee, and thus paid through the payroll subject to PAYE and NI, or a sub-contractor, paid by invoice.
How to assess employment status
HMRC provides a tool to assist in defining the worker and employer relationship to confirm employment status: https://www.gov.uk/guidance/check-employment-status-for-tax.
However, it must be noted that this is not a legally binding classification of the employment status and should only be used to assist you in defining the employment status.
When assessing employment status, you should consider if the individual:
- Has an employment contract
- Has a contract of future promised payment or benefits
- Can claim expenses
- Uses company resources and equipment
- Has access to any workplace benefits (Healthcare, Sick Pay etc)
- Has any decision-making power within the company or their duties could be performed by a substitute
If the answer to any of these questions above is ‘Yes’ then it is likely, based on the IR35, that the individual should be classed as an employee. In this instance, you should set them up on your payroll immediately. You will then be liable for ensuring that correct PAYE and National Insurance contributions are deducted from the employees pay.
The employer firstly must operate PAYE and National Insurance contributions through the payroll for all employees, this applies where payments are made directly to individuals based on their employment contract.
In the case where individuals are deemed to be classed as employees rather than self-employed then it is important to consider the ‘deemed employment payment’. This is understood to be the earnings of the individual for any engagement between the two parties, this equates to earnings that would be subject to PAYE and NI.
Failure to comply with IR35
If the company has failed to comply correctly with IR35 regulations regarding each engagement of an ‘intermediary’ then the company may be subject to financial penalty. However, if the company discloses any breach then it is possible that any penalty will be reduced. On the other hand, ignoring or failing to report a breach could result in more severe penalties.
For other updates to legistlation - read our Gender Pay Gap blog: