IR35 - What you need to know

What is IR35?

IR35 is a complicated set of tax laws that form part of the Finance Act and impacts contractors, freelancers and interims operating via their limited companies. The first piece of legislation came into force in April 2000 and is otherwise known as the Intermediaries Legislation.

IR35 is designed to reduce tax avoidance by contractors who HMRC believe to be “disguised employees”.  People who work in a similar way to full-time employees but bill for their services via their limited companies to make their business as tax efficient as possible but whose relationship with their client is such that had they been paid directly they would be employees of the client are considered to be ‘disguised employees’.

IR35 aims to address the group of contractors who;

(a) operate through an intermediary company, typically a personal service company (PSC) which is a limited company that they own, and

(b) would otherwise be classed as employees in the absence of the intermediary. For example, working permanently and full-time for a single client (that resembles an employer).

The majority of these transactional relationships are genuine, and there are plenty of sole trader limited companies operating in the UK. However, it’s not uncommon for some organisations to pay people in this way so that they can avoid paying employers’ National Insurance contributions or providing employment benefits.

When is this happening?

In April 2017 the Government introduced the "Off-Payroll Reforms", which is a separate piece of new tax legislation that applies to the public sector, but which is also referred to as "IR35". The Government is replacing the original IR35 legislation with the new Off-Payroll Tax, which was initially introduced into the public sector in April 2017, and will be extended to the private sector from April 2020.

What is the new Off-Payroll Tax?

The new Off-Payroll tax came into force by HMRC as it became apparent that the original rules were unenforceable. Whilst they both contain the common theme of "deemed employment", the newer rules introduce a different set of tax treatment, meaning that organisations  will now have to assess the contractor’s status, but, more importantly, pay employment taxes on top of the fees paid to the contractor.

Why did the government introduce IR35?

IR35 legislation ensures that contractors pay the same tax and National Insurance contributions as an equivalent employee would. The new changes to be implemented in April 2020 for private sector contractors will transfer responsibility from contractors to large and medium companies to assess IR35.

Since 2000, contractors have been responsible for self-assessing their IR35 status and National Insurance Contributions. This arrangement has been ineffective and HMRC estimates that, under current rules, the cost of non-compliance in the private sector would escalate to £1.3bn by 2023/24.

Another problem that has contributed to the changes is the scenario where an employee ceases their employment with their employer on Friday only to return on Monday to do the same role in the same location.  The difference of course is that they return as a contractor or consultant trading through a personal services company and pay less tax. 

This can also save the engaging organisation a significant amount of cash, as they no longer have to pay employers’ NICs of 13.8% or the Apprenticeship Levy of 0.5%.  It also means they do not have to offer any employment rights or benefits.

Who will IR35 affect?

IR35 is not only determined by the contents of a written contract, but also looks at the actual working practices. When the working practices do not reflect the contractual terms, the working practices will take precedence over the terms of the contract. There are many aspects to consider when determining whether a contract is subject to IR35, but the two most important factors are;

Control (right of): what degree of control does the client have over what, how, when and where the worker completes the work.

Substitution: is personal service by the worker required, or can the worker send a substitute in their place?

If the client has no right of control over the manner in which you carry out your work and you have the right to either send a substitute worker in your place or sub-contract some of the work or engage other workers to assist you, then it is likely that your contract will fall outside of IR35.

Other factors are then taken into account to determine whether you are caught by IR35 include the contract type, provision of equipment etc. HMRC will apply an employment test to each case that is based on the actual working practices rather than the contract.

All of this evidence is taken into account, and if the balance of probabilities is that the worker is an employee then IR35 applies.

Where the client or end-user is a small business, the PSC will continue to be responsible for assessing if IR35 applies.  Small business, for the purposes of IR35 are;

·         Businesses with a £10m or less

·         Balance sheet of £5m or less

·         50 employees or less.    

If the client or end user is larger than this, they have to make the decision on IR35.  

Can IR35 be avoided?

IR35 can’t be circumvented by organisations, other than to make the choice to engage all contractors on fixed term contracts (FTC).  This would be an expensive, albeit less complicated way of dealing with IR35.  Larger organisations would then have to negotiate with all the contractors they are currently engaged with to take a significant cut in rates in order to cover the additional costs although could be a solution for smaller businesses that don’t use interims that often.

However, for organisations engaging self-employed contractors, IR35 will not apply. That does not prevent HMRC from launching an investigation at a later date.  For those who wish to engage interims outside IR35, and mitigating any IR35 risk they can use IR35 tests to determine if this is correct.

What are the main changes to IR35?

The new IR35 legislation to be introduced in April 2020 shifts responsibility for assessing IR35 obligations from the contractor or PSC to the end-user, which is the company that is the end client.

Where the client concludes that IR35 applies, the ‘fee payer’ (which may be the end-user themselves, a recruitment company, or other third party paying the intermediary) will be responsible for accounting for and paying the related tax and NIC to HMRC, including the additional cost of Employer’s NIC.

Under the proposed changes, the new rules aim to reduce the cost of non-compliance and make it easier for HMRC to monitor and enforce compliance in the future.

However, determining whether you are caught by IR35 is complex, and ideally you should seek expert IR35 advice.

Further Reading and IR35 Resources

HM Government Good Work Plan, December 2018 (Pdf)https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/766167/good-work-plan-command-paper.pdf

Guidance: Off-payroll working through an intermediary (gov.uk) https://www.gov.uk/guidance/understanding-off-payroll-working-ir35

Policy paper: Rules for off-payroll working from April 2020 (HMRC, 11th July 2019) https://www.gov.uk/government/publications/rules-for-off-payroll-working-from-april-2020

IR35: Working through an intermediary (gov.uk)  https://www.gov.uk/topic/business-tax/ir35

 

The argument in favour of mentoring

The concept of mentoring is well known in business – but what precisely is it?
Mentoring is often defined as a professional relationship in which an experienced person (the mentor) assists another (the mentoree) in developing specific skills and knowledge that will enhance the mentoree’s professional and personal growth.

Therefore – by default – a mentor is a more experienced individual willing to share knowledge with someone less experienced in a relationship of mutual trust. Or, perhaps, a mentor is a trusted advisor or guide or a person who has a sincere desire to enhance the success of others. So, it’s worth understanding a bit more about the benefits of mentoring……

Mentoring enables an individual at any level in an organisation to increase their network through the introduction to people and areas that they might not previously have had access to. Furthermore, mentoring can help individuals cope with periods of major transition and the mentor can help to navigate people through difficult challenges such as influencing key stakeholders, challenging existing mindsets – the status quo - and getting colleagues on board with change.

A mentor can also assist with identifying skills gaps which may be hampering career progression. At some stage in their career, most people will find themselves at a career crossroads which may manifest itself in them being overlooked for promotion or opportunities or unable to understand why the business saw the need to recruit externally. In these situations, mentoring can offer an open and independent perspective as well as objective feedback. Sometimes, we have to hear things we don’t like or want to hear…..

Managing people can often be an area where people can benefit from mentoring. Good people and inter personal skills are critical to career progression and a mentor can discuss management and leadership styles, ways to effectively engage with the team, improving cross functional working as well as looking at the people agenda through transition and change programmes.

It is important to state that too often people say that if you want to scale the corporate ladder, you need a mentor. Mentoring will not work where it is non-neogotiable – the person must genuinely want it and furthermore, if mentoring is only being undertaken for the purposes of paying lip service, it places an unfair and unrealistic dependency on the mentor.

Mentoring is highly dependent on the personal chemistry between the parties, who must both be committed to the process. A chemistry mismatch can occur for all sorts of reasons but, it must be a professional relationship and the process will lose sight of its goal if it becomes too comfortable where there is familiarity and a lack of challenge.

We all complain that time is our greatest challenge and too many people complain that there are insufficient hours in a day. Mentoring is an investment in time and blocking out time for sessions is essential – technology, particularly Skype, can assist where the parties are geographically miles apart, but nothing replaces real face to face engagement for a mentoring session.

We all like to focus on the positive and whilst mentoring is a process for moving forward, the process gives an opportunity to reflect on the past and sometimes, the mentor can share experiences from their career and the mistakes they may have made because the value in making a mistake is to understand what lessons can be learnt to prevent it recurring.

So in summary, whilst we understand the benefits of mentoring, what are the “absolutes?”

1. Don’t do it for the sake of it – be committed to the process
2. Invest time both in preparing for a session and follow up actions
3. Personal chemistry – it must be right
4. Be clear what the purpose is
5. Mutual respect

Article written by Adrian Berwick


Macallam offer a Personal Career Transition service which is a hybrid of coaching and mentoring and assists individuals with the challenges of transition in their professional life.
For more information please call 01423 900804

Does the engagement of an interim manager ensure project success?

Bringing in additional project management resources can not only save a failing project but also help define what constitutes project success at an early stage

Projects fail all the time. What constitutes a project’s success and how it is defined will differ from organisation to organisation.

The standard expectation for a successful project is that it’s delivered on time, on budget and is of the right quality. This is often the case if the project has been competently managed and led.

It is, however, much more important that the business case and the benefits are made clear at the beginning of a project and readjusted along the journey, because this is the real measure of a project’s success.

Projects fail because the latter point hasn’t been realistically set out, the requirement has changed due to market or economic forces, or there has been a lack of communication at all levels.

If a project’s success is determined by its delivery in line with expectations, then the person who has set the guidelines will have a determining factor as to the success or failure of the project. This is usually the project sponsor, the person who “owns” it.

Project governance is the key to success, and business managers should be involved along the way to ensure the project is delivered in line with expectations.

Formal project governance is the big change we have seen over the past few years, and this was a response to the lack of ownership and control by the very people who require and fund the outcome of projects – the business managers.

A project running behind budget and time would usually be seen as a failure, but in fact a project’s success is determined by the benefit it delivers to the business, and if that means the cost and completion date have to be moved with the agreement of the stakeholders, then so be it.

Interim managers are often bought in to rescue “failing” projects. This can make perfect sense, because having a fresh set of eyes on the situation and making the necessary changes to drive the project forward can get the project team and its sponsors realigned.

There are real benefits to doing this, not least because once the project is underway and costs have been incurred, it can be difficult for the project team to pull it back on track. An interim manager can ensure that stakeholders become realigned to the outcomes and that people are ready for the change the project was intended to deliver.

Finding and retaining the right resource is challenging but critical. Once the right skill set has been defined, engaging externally can sometimes be the only option.

A more fruitful solution is sometimes to resource externally to lead the project from the outset, with someone whose only focus is to enable change and who won’t be drawn in to business as usual.
One of the key ingredients is to spot the warning signs and act immediately.  Planning is paramount to the success of a project, and it is important to define what constitutes success at the early stage of the process. It is often the case that the project manager will be held to account if the project is deemed to be a failure, but actually the project sponsor is the person truly responsible for the project’s success. If the expectations have not been realistic, if communication has been poor, if the original business need has changed, and if adequate training has not been provided, then this all points to the project sponsor.

Taking this back to grassroots, there could be a cultural problem if the business is not one that is used to embracing change: the people won’t have the motivation to make it work and hence it’s another pointer towards project failure.

The adoption of a strong, centralised project management office (PMO) allows for the transfer of knowledge and sharing. Knowledge-sharing and best practice will help ensure the future success of projects.

If this is led with a good PMO director and appropriate, experienced project managers, not just certified project managers (as this only shows they understand a method), then at least the risk of failure is minimised. Again, interim managers can be engaged to set this up.

Ensuring project success is not easy. If it was, there would be far fewer failed projects. There are, however, good practices to adopt in order to minimise the risk of failure. If the proper planning, communication and governance is adhered to, stakeholders’ expectations are properly managed and the right business requirements have been set, then you stand a fighting chance.

After all, nobody sets out to fail or to do a poor job, but one of the key ingredients is to spot the warning signs and act immediately. If that means bringing in an additional resource, then it could be money well spent.



Follow the link below to read the article in Executive Grapevine as featured in The Guide to Interim Management

https://www.executivegrapevine.com/content/article/magazine-2018-02-06-does-the-engagement-of-an-interim-manager-ensure-project-success