Why the implementation of IR35 reform in the private sector is not the end and HMRC will be keen to target wider employment status next
Employment status involving workers using their own limited companies falls under the IR35 rules, which were originally introduced in 2000. The legislation has been subject to reform over recent years, the latest of which has just come in on 6th April this year, and has therefore garnered much publicity, aided by its neat and distinctive moniker (“IR35” was the number of HMRC’s press release announcing the Intermediaries Legislation).
But the tax risks associated with employment status extend far wider than IR35 and, for the reasons above, may not be recognised or understood by those who bear them.
It is time to get to grips with the wider concept of employment status and understand what your responsibilities may be beyond the IR35 legislation.
What is employment status?
In employment law, employment status is used as a way to categorise working people in order to determine both that person’s rights, and the responsibilities of their engager/employer.
The main five categories of employment status according to the .gov website are as follows:
- Worker e.g. a person working on a zero hours contract
- Self-employed and contractor
- Director e.g. a board member that oversees business affairs
- Office holder e.g. fulfilling an appointed position within an end client’s company
Employment status covers a much wider scope than IR35 which more specifically targets personal service companies. This leaves us with the big question of, who should be concerned about employment status?
You will need to consider wider employment status if you are a:
- Engager of sole traders (higher risk particularly in construction)
- Business where sole traders may be used in the wider supply chain
- Recruitment agency placing sole traders into clients
Tax versus employment rights
Employment status, more often than not, is used as a term to talk solely about the employment rights of a person. However, looking at employment status here, we are specifically focusing upon the impact that employment status has on tax, especially highlighting the further threat of HMRC enquiries.
Because of the way our system works, employment status for tax and employment status for employment rights are not aligned. An example of this would be in the recent Uber case. The main focus for that case was upon the rights of the drivers, however, that will have no direct impact upon their tax status.
Cases such as this potentially do even more to hide the possible tax-related investigation and liability risks for companies.
What we are seeing here at Qdos is that employment status for tax is becoming a hidden risk for engagers of self-employed workers. We see this particularly in construction – which makes up the largest portion of self-employed workers and is therefore likely to become HMRC’s biggest target.
The problem in construction is that we also have the Construction Industry Scheme (CIS), which regulates tax receipts by forcing deductions at source.
Many who work in construction might be under the impression that the CIS scheme is connected to employment status, and that if firms fulfil their CIS obligations that it will deal with status. This isn’t the case though and companies who engage self-employed workers will still have a significant potential liability.
IR35 reform doesn’t signal the end of employment status, why?
Again, the term employment status is used often and appears heavily rooted in the conversation about IR35. While tax-based employment status is integral to IR35, that does not mean that employment status is only applicable where IR35 is.
IR35 reform will not provide the solution for employment status worries and it definitely will not wipe the slate clean, unfortunately. It is important that we acknowledge employment status is not going anywhere.
Qdos CEO, Seb Maley, had this to say about employment status:
“I believe that both the reform, and the fact that HMRC will be geared up to police it, mean that we will see an increase in compliance activity on both fronts.
The changes to IR35 means that HMRC can chase up both IR35 and traditional employment status in exactly the same way – and presumably they will resource themselves accordingly.
Therefore, an increase in employment status cases may end up being a direct by-product of the IR35 reform.”
If you are at all concerned about what employment status could mean for you, don’t hesitate to get in contact with a member of our team to discuss your options. For more information, please get in touch on firstname.lastname@example.org or 0116 478 3390.