Understanding IR35, employment status for tax, and what employment status could mean for your organisation
Employment status, whilst used as an umbrella term, refers to the requirement that organisations ensure the workers they engage are genuinely self-employed rather than fulfilling the role of an employee under the guise of a self-employed person.
Whilst the wider use of the term employment status covers all workers, sole traders and gig economy workers included, IR35 applies only to those organisations engaging personal service companies or limited companies.
A notable similarity is that both IR35 and employment status for tax relate to HMRC’s categorisation of workers. This categorisation serves as an indicator for how much tax and national insurance should be deducted from the worker.
What is employment status for tax?
Employment status splits into two distinct categories. We have employment status for rights and employment status for tax. For a clear breakdown of the differences between these two forms of employment status, take a look at our dedicated employment status webpage. In this article, we will be focusing on employment status for tax purposes only, as that is where we see some overlap with the IR35 legislation.
Employment status for tax focuses upon direct relationships between the client and their workers and not engagements involving recruitment agencies. In these direct relationships, the tax liability for employment status sits with the engager of the sole trader. That engager is liable for Employer’s National Insurance and any other employment tax in the event that the engaged sole traders are deemed to be employed for the purposes of tax.
Who does employment status concern?
Employment status for tax is applicable to the direct relationship between engagers and sole traders. Particularly businesses such as IFAs (financial advisory firms), construction companies, and those engaging coaches or tutors are at present considered to be high-risk industries and will undoubtedly feel HMRC’s eyes and the threat of enquiry most.
What is IR35?
Introduced in 2000, the IR35 legislation was created by HMRC with the specific aim of targeting the use of an intermediary (a personal service company) as a loophole to employment status to avoid the applicable tax.
It may be wise to consider IR35 as falling under the wider umbrella of employment status for tax. The purpose of determining a worker’s IR35 status is to understand the true employment status of that worker so that the correct tax and other necessary deductions are made.
Who does IR35 concern?
As mentioned previously, the IR35 legislation only applies to engagers of workers providing services through their personal service companies.
How are IR35 and employment status for tax different?
Whilst IR35 status and employment status for tax are both determined using the same status tests by HMRC, they are not the same.
Employment status for tax throws a much wider net and applies to more engagements than IR35 does. Because of the wider reach of employment status for tax, it is considered a larger threat to the industry. This should be concerning, especially considering how easy it can be to overlook undertaking all-important employment status compliance activities.
Another notable difference between IR35 and employment status for tax is that for IR35, determinations it is a legal requirement for engagers to assess their workers and provide a Status Determination Statement. In the case of employment status for tax, for now, there is no such requirement. Despite this, the risk that comes with employment status should not be underestimated.
What could employment status mean for me?
Taking into consideration the effect of the past year on government budgets, it might come as no surprise that HMRC are keen to scrape back revenue wherever possible. As such we expect to see a spike in compliance activities. With this in mind, it is important to understand the threat that employment status poses to organisations:
- HMRC perform routine checks- A dedicated team are tasked with policing engagers of all flexible workers.
- Impact of a potential enquiry- If flagged up during a routine check, once HMRC determine there is a case to be raised, mounting a defence for such an exhaustive enquiry is no easy task. It can be time-consuming, costly, and potentially go on to a tax tribunal.
By not ensuring your due diligence for employment status for tax you are leaving yourself open to the financial risk of an investigation by HMRC. Now that HMRC have a much less cumbersome task in policing the reformed IR35 legislation, it only makes sense that they may also target organisations who engage sole traders under the same overarching strategy.
If your organisation has engagements with either or both limited companies and sole traders, we strongly advise that due diligence is undertaken across all off-payroll workers in order to protect against this dual risk.
What should be done?
Coming to understand your employment status responsibilities isn’t as hard as it might seem. Due to the fact that employment status for tax follows the same status tests as IR35, this means that engagers of sole traders should go through the same risk assessment that is required of IR35.
You should undertake regular working practice assessments and keep a clear record of any evidence that points towards a worker’s employment status.
Employment status, whilst complicated, is entirely manageable. We strongly advise that engagers seek specialist representation in the event of any compliance activity from HMRC.
Now that IR35 reform has been implemented in the private sector, we at Qdos expect to see employment status take up a sizeable portion of HMRC’s attention. Because of this, any organisations directly engaging sole traders should ensure there are adequate compliance processes in place and seek the accurate and fair determination of employment status.
In addition to our award-winning IR35 services, we provide a range of solutions to help ensure businesses are engaging self-employed workers under the correct employment status – from employment status assessments to insurance. For more information, please get in touch at firstname.lastname@example.org or 0116 478 3390.