Budget, DMS Posts, Tax

What’s changing for small businesses in the 2020/2021 tax year?

A new tax year is starting on April 6th, which will mean many of the changes announced in recent Budgets will come into effect. Before the 2020/2021 tax year kicks off, here’s a roundup of some of the key changes small business.

Changes to some tax and National Insurance rates and bands

Some of the rates and bands have been frozen, while others have increased. Here are the rates and bands that will come into effect on 6th April:

England, Northern Ireland and Wales

2020/212019/20
Personal allowance£12,500£12,500
Employee’s NI becomes due at£9,500£8,632
Employer’s NI becomes due at£8,788£8,632
Higher rate tax becomes due at£50,000£50,000
Class 2 NI becomes due when profits exceed£6,475£6,365
Class 2 NI per week£3.05£3.00
Class 4 NI becomes due when profits exceed£9,500£8,632

Scottish Tax Rates and Bands

The Scottish rates of income tax will change to the below on 11th May 2020.

2020/212019/20
Personal allowance£0 – £12,500£0 – £12,500
Starter rate 19%£12,501 – £14,585£12,501 – £14,549
Basic rate 20%£14,586 – £25,158£14,550 – £24,944
Intermediate rate 21%£25,159 – £43,430£24,945 – £43,430
Higher rate 41%£43,431 – £150,000£43,431 – £150,000
Top rate 46%Over £150,000Over £150,000

Employment Allowance Increased

The Employment Allowance will increase from £3,000 to £4,000 on 6th April but from this date, only businesses with an employer’s NI liability of under £100,000 a year will be eligible to claim the allowance.

National Minimum Wage / National Living Wage rates per hour increased

The following rates will all increase on 6th April:

2020/212019/20
Employees aged 25 and over: NLW£8.72£8.21
Employees aged under 18: NMW£4.55£4.35
Employees aged 18-20: NMW£6.45£6.15
Employees aged 21-24: NMW£8.20£7.70

Student Loan Income thresholds

The levels of income above which student loan repayments are due will change on 6th April as follows:

2020/212019/20
Undergraduate loan: plan 1£19,390£18,935
Undergraduate loan: plan 2£26,575£25,725
Postgraduate loan£21,000£21,000

Working from home rate for employees increased

If any of your clients operate their own limited company and claim costs for working from home, HMRC will ask them for proof of any working from home costs of over £6 (rather than £4) from 6th April 2020.

Delays and cancellations to planned changes

Corporation Tax rate holds steady

The rate at which limited companies pay Corporation Tax was originally planned to decrease from 19% to 17% on 1st April but these plans have now been cancelled. The rate of Corporation Tax will now remain at 19%.

IR35 changes delayed

Changes to the operation of IR35 legislation in the private sector that were due to take effect on 6th April 2020 have now been delayed until April 2021.

DMS Posts, PAYE, Tax

Coronavirus Job Retention Scheme – What do we know so far?

The Government announced an extensive package of support on Friday 20 March for employers coping with the commercial difficulties arising from Covid-19. This has been welcomed by employers, many of whom we have been speaking to, who have been extremely concerned about how to pay wages when revenues have dried up or they have been forced to close. Those businesses have been facing very tough choices around lay off, short term working and redundancies – while trying to balance the finances, needs of the business and the livelihoods of their staff and communities. 

The key measure announced to help employers is the Coronavirus Job Retention Scheme. Through this, employers can claim a grant to cover up to 80% of an employee’s wage costs. At the time of writing (19:00 on 22 March), we are awaiting detailed guidance as to exactly how this will work: but what do we know about the scheme so far?

Which employers are eligible for the scheme?

All UK employers can apply – you don’t need to be in any specific sectors, just pay people via PAYE. This includes businesses of any size and includes charitable or non profit. 

How do you access the scheme?

According to guidance on the Gov.uk webpage, employers will need to:

  • designate affected employees as ‘furloughed workers,’ and notify their employees of this change – changing the status of employees remains subject to existing employment law and, depending on the employment contract, may be subject to negotiation.
  • submit information to HMRC about the employees that have been furloughed and their earnings through a new online portal. HMRC will set out further details on the information required.

It is unclear at this time what (if any) financial information an employer would need to provide to HMRC to show that you cannot cover staff costs due to Covid-19. 

The employer will be able to claim a grant of up to 80% of the employees wage for all employment costs, up to a cap of £2,500 per month.

The scheme will be backdated to 1 March (useful for employers who have already had to make lay offs) and will be open for at least 3 months, but extended ‘for longer if necessary’. 

As this is a reimbursement grant, the employer will make the wage payment to the furloughed employee and then be reimbursed by HMRC. At this stage the timescale is unknown, although the Chancellor suggested the first payouts could be made by the end of April at the latest. Please see here for more details of support that may assist with cash flow through this time.

What does Furloughed mean?

There is no previous legal term for this and it is a completely new concept to English Employment Law. The common definition of to ‘furlough’ is to allow or force someone to be absent temporarily from work. 

We understand that if an employer needs to make an employee redundant or lay them off, they can instead discuss with the employee them becoming classified as a ‘furloughed worker’. This would mean they would remain on the employer’s payroll, rather than being made redundant or laid off with no pay. Their employment would continue but they could not undertake any work for the employer while classified in this way.  

We are still waiting for the detail, but it seems most likely that if an employee has an express lay off clause in their contract, the employer could designate the employee as a furloughed worker. The employer would need to discuss this with staff. 

If the employee does not have a lay off clause in their contract, the employer is likely to need to have a discussion and seek the employee’s consent to be classified as a furloughed worker.  Given that the alternative could be redundancy, most employees are likely to agree. This may depend on what amount of paid notice, Statutory Redundancy Pay and holiday pay they would receive if made redundant. It may also depend on whether the employer is able to ‘top up’ the pay (so the furloughed worker is paid 100% not 80%) or offer for the employee to take or be paid for their accrued but not yet taken annual leave as well. 

Does the employer have to pay more than 80% to Furloughed Workers?

No – the early guidance is clear that the employer could choose to fund the differences between this payment and the employee’s salary, but does not have to.

At this point in time we don’t know whether the 80% grant is limited to just salary or whether it extends to include Employers National Insurance or costs for any benefits such as pensions, health insurance etc. Although it seems unlikely, this might mean that the sum actually paid to the employee is less than 80% of net salary, so care should be given by employers when communicating with staff to say that wage payments for furloughed employees will be in accordance with the scheme.  

We also don’t know how that 80% would be calculated for those whose monthly or weekly salary varies. Again at this stage it is best to communicate to those staff that payments will be in accordance with the scheme once clarified. 

Possible knock on impacts?

At this stage, it is right to feel relieved that there will be a safety net. Further clarification will be welcome, especially in the following areas which could become problematic as this develops:

  • If an employer need some employees to continue to work, how do they choose who to classify as a furloughed worker and who should work on? In the absence of any guidance, we would recommend a selection criteria akin to a redundancy selection matrix, making sure you avoid any discriminatory criteria. It will be interesting to see whether any Government emphasis is placed on giving furloughed status to those who have medical conditions that place them at higher risk from Covid-19 or those who need to care for dependants. Without that Government emphasis employers may face discrimination risks in doing so. 
  • How do you deal with dissatisfaction of those good employees that you ask to carry working on, when other possibly less high performing employees are offered and become furloughed?
  • How do you deal with those on Maternity? We expect it will be the position that those on maternity remain on maternity leave until they wish to return, at which point you would need to assess whether there is work for them or offer them to be furloughed. This could cause issues given that the payment to employees who are furloughed could be significantly higher than statutory maternity pay.
  • What about those who are currently off sick or self isolating on SSP? Should they be furloughed?
  • If there is a delay in payment by HMRC, can you pass that delay on to your employees? This seems unlikely to be encouraged and without provision by the Government may amount to a breach of contract or unlawful deduction of wages. HMRC has set-up a dedicated helpline on 0800 0159 559 for businesses and individuals in financial distress.

We anticipate HMRC will provide details in due course and we will provide updates regularly. In the interim we recommend you regularly check the Gov.uk website which is being updated most days.

DMS Posts

COVID-19

Government Bailout Measures


The Chancellor has set out a package of temporary, timely and targeted measures to support public services, people and businesses through this period of disruption caused by COVID-19, but new guidance is being issued daily.

  • Government grants will cover 80% of the salary of retained workers up to a total of £2,500 a month, backdated to March 1st and will be open before the end of April for at least three months 
  • Coronavirus Business Interruption Loan Scheme will now be 12 months interest-free, starting Monday 23rd March 2020 
  • VAT payments: the government is deferring the next quarter of VAT payments from now to mid-June. Businesses will have until the end of the financial year to repay those bills. 
  • Self-employed people can now access, in full, Universal Credit at a rate equivalent to Statutory Sick Pay for employees
  • Self-assessments: the next self-assessment payments will be deferred until January 2021
  • Statutory Sick Pay relief package for SMEs: businesses with fewer than 250 employees can reclaim up to two weeks’ of Statutory Sick Pay per employee paid for sickness absence due to COVID-19. Employers should maintain records of staff absences and payments of SSP, but employees will not need to provide a GP fit note
  • 12-month business rates holiday for all retail, hospitality and leisure businesses in England
  • Small business grant funding of £10,000 for all business in receipt of small business rate relief or rural rate relief
  • Cash grants for retail, hospitality and leisure businesses: grants of up to £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000
  • Coronavirus Business Interruption Loan Scheme offering loans of up to £5 million for SMEs through the British Business Bank and the government will cover the first 6 months of interest payments
  • Support for larger firms through the COVID-19 Corporate Financing Facility: the Bank of England will buy short term debt from larger companies
  • HMRC Time To Pay Scheme: all businesses and self-employed people in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC’s Time To Pay service. These arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities.
  • Insurance claims: businesses that have cover for both pandemics and government-ordered closure should be covered, as the government and insurance industry confirmed on 17 March 2020 that advice to avoid pubs, theatres, etc. is sufficient to make a claim as long as all other terms and conditions are met.

Help with your Income

If your income is affected by COVID-19 you may be able to claim Sick Pay or benefits to support you through this period. Your income may be affected due to working less, no longer working, self-isolating, or caring for someone who is sick. You may be able to receive:

1. Sick Pay

2. Contributory Employment and Support Allowance

3. Contributory Jobseekers Allowance

4. Universal Credit

5. Council Tax Support

6. Rent Rebate (Northern Ireland)

7. Help with your rent

8. Help with your mortgage

9. Free School Meals

For more information click here

Advice for Employers and Employees

Employers should consider some simple steps to help protect the health and safety of everyone during the coronavirus (COVID-19) pandemic.

It’s good practice for employers to:

  • keep everyone updated on actions being taken to reduce risks of exposure in the workplace
  • make sure everyone’s contact numbers and emergency contact details are up to date
  • consider extra precautions for staff who might be more vulnerable, for example if someone is pregnant, aged 70 or over, or has a long-term health condition
  • make sure managers know how to spot symptoms of coronavirus and are clear on any relevant processes, for example sickness reporting and sick pay, and procedures in case someone in the workplace shows symptoms of the virus
  • make sure there are clean places to wash hands with hot water and soap, and encourage everyone to wash their hands regularly
  • provide hand sanitiser and tissues for staff, and encourage them to use them
  • consider if any travel or meetings are necessary and if meetings can be held remotely instead
  • keep up to date with the latest government coronavirus advice on GOV.UK

Employers must not single anyone out unfairly. For example, they must not treat an employee differently because of their race or ethnicity.

Self-isolation and sick pay

Employees and workers must receive any Statutory Sick Pay (SSP) due to them if they need to self-isolate because:

  • they have coronavirus
  • they have coronavirus symptoms, for example a high temperature or new continuous cough
  • someone in their household has coronavirus symptoms
  • they’ve been told to self-isolate by a doctor or NHS 111

If someone has symptoms and lives alone, they must self-isolate for 7 days. 

If someone lives in a household and is the first to have symptoms, they must self-isolate for 7 days. Everyone else in their household must self-isolate for 14 days.

If anyone else in the household starts displaying symptoms, the person with the new symptoms must self-isolate for 7 days. This is regardless of where they are in the 14-day isolation period. 

Find more guidance for households with possible coronavirus on GOV.UK.

Employers might offer more than SSP – ‘contractual’ sick pay. Find out more about sick pay on ACAS.gov.uk

If an employee or worker cannot work, they should tell their employer:

  • as soon as possible
  • the reason
  • how long they’re likely to be off for

The employer might need to be flexible if they require evidence from the employee or worker. For example, someone might not be able to provide a sick note (‘fit note’) if they’ve been told to self-isolate for more than 7 days.

Find advice about self-isolating on NHS.UK

Social distancing, flexible working and working from home

Current government advice is for everyone to try and stop unnecessary contact with other people – ‘social distancing’. This includes:

  • working from home where possible
  • avoiding busy commuting times on public transport
  • avoiding gatherings of people, whether in public, at work or at home

Employers should support their workforce to take these steps. This might include:

  • agreeing to more flexible ways of working, for example changing start and finish times to avoid busier commuting times
  • allowing staff to work from home wherever possible
  • cancelling face-to-face events and meetings and rearranging to remote calling where possible, for example using video or conference calling technology

Vulnerable people

Employers need to be especially careful and take extra steps for anyone in their workforce who is at increased risk from coronavirus.

They include, but are not limited to, those who:

  • have a long-term health condition, for example asthma, diabetes or heart disease, or a weakened immune system as the result of medicines such as steroid tablets or chemotherapy
  • are pregnant
  • are aged 70 or over
  • care for someone with a health condition that might put them at a greater risk

Find out more about social distancing and vulnerable people on GOV.UK

Working from home

Where work can be done at home, the employer could:

  • ask staff who have work laptops or mobile phones to take them home so they can carry on working 
  • arrange paperwork tasks that can be done at home for staff who do not work on computers

If an employer and employee agree to working from home, the employer should:

  • pay the employee as usual
  • keep in regular contact
  • check on the employee’s health and wellbeing

Find out more about:

If an employee does not want to go to work

Some people might feel they do not want to go to work if they’re afraid of catching coronavirus. This could particularly be the case for those who are at higher risk.

An employer should listen to any concerns staff may have and should take steps to protect everyone.

For example, they could offer extra car parking where possible so that people can avoid using public transport.

If an employee still does not want to go in, they may be able to arrange with their employer to take the time off as holiday or unpaid leave. The employer does not have to agree to this.

If an employee refuses to attend work without a valid reason, it could result in disciplinary action.

Find out more about absence from work



If the employer needs to close the workplace

An employer may want to plan in case they need to close the workplace temporarily.

This might be a difficult time for both employers and staff. It’s a good idea to make sure staff have a way to communicate with the employer and other people they work with.

Short term lay-offs and short-time working

In some situations, an employer might need to close down their business for a short time, or ask staff to reduce their contracted hours.

If the employer thinks they’ll need to do this, it’s important to talk with staff as early as possible and throughout the closure.

Employees can be laid off without pay where there is a specific term in their contract allowing the employer to do so. When an employee is laid off, they might be entitled to a statutory guarantee payment from the employer, limited to £29 a day for a maximum of five days in any period of three months. 

On days when a guarantee payment is not payable, employees might be able to claim Jobseekers Allowance.

Find out more about:

Redundancies

Due to the current climate, employers may feel it necessary to make staff redundancies in certain areas of the business where there is a reduction in workload. Correct legal procedure must be followed with a fair consultation process and appropriate notice.

Employees with less than two years’ service are not entitled to redundancy payment and do not have unfair dismissal rights.

Using holiday

Employers have the right to tell employees and workers when to take holiday if they need to. For example, they can decide to shut for a week and everyone has to use their holiday entitlement.

If the employer does decide to do this, they must tell staff at least twice as many days before as the amount of days they need people to take.

For example, if they want to close for five days, they should tell everyone at least ten days before.

This could affect holidays that staff have already booked or planned. So employers should:

  • explain clearly why they need to close
  • try to resolve anyone’s worries about how it will affect their holiday entitlement or plans


If an employee needs time off work to look after someone

Employees are entitled to time off work to help someone who depends on them (a ‘dependant’) in an unexpected event or emergency. This could apply to situations to do with coronavirus.

A dependant does not necessarily live with the person, for example they could be an elderly neighbour or relative who relies on the person for help.

There’s no statutory right to pay for this time off, but some employers might offer pay depending on the contract or workplace policy.
 
The amount of time off an employee takes to look after someone must be reasonable for the situation. For example, they might take 2 days off to start with, and if more time is needed, they can book holiday.

If a dependant such as a partner, child or relative in the same household gets coronavirus symptoms, they should receive Statutory Sick Pay (SSP) as a minimum for this time. They’ll also need to follow self-isolation guidance on GOV.UK.
 
Find out more about time off for dependants.

School closures

As schools in England, Scotland and Wales will be closing, this will have an affect on care and working arrangements. This may be an anxious time for parents, and employers will need to be planning cover at work. 

If employees need emergency time off for child care or to make new arrangements, they can use:

Employers and employees can consider these steps:

  • talking to each other early on about time off that might be needed 
  • agreeing regular conversations so both can plan ahead
  • agreeing flexible working instead of taking longer periods of time off, for example working from home or changing working hours to allow for child care

If any agreement is made, it’s a good idea for it to be in writing.


If someone has coronavirus symptoms at work

If someone becomes unwell in the workplace with coronavirus symptoms, they should:

  • tell their employer immediately and go home
  • avoid touching anything
  • cough or sneeze into a tissue and put it in a bin, or if they do not have tissues, cough and sneeze into the crook of their elbow
  • use a separate bathroom from others, if possible

The unwell person must self-isolate at home for 14 days if they live with others, or 7 days if they live alone.

You can get more advice or help by either:

It’s best for the unwell person to use their own mobile phone or computer to access these services.


If someone with coronavirus comes to work

If someone with coronavirus comes to work, the workplace does not necessarily have to close, but they should follow cleaning advice.

See advice for cleaning workplaces on GOV.UK.


More coronavirus advice

Budget, DMS Posts, Other

Covid-19: IR35 changes delayed and other financial measures

As part of a wide package of financial measures designed to support the UK economy through this turbulent period, Chancellor Rishi Sunak unveiled a £350bn support package on Tuesday night.

IR35 reforms in the private sector delayed

In an unexpected U-turn, the government has announced that its planned reforms to IR35 legislation will be delayed for a year. The reforms, which will affect contractors who work in the private sector, were due to be implemented on 6th April this year but will now come into effect in April 2021. The delay should come as welcome news to accountants, bookkeepers and their contractor clients who work in the private sector.

Changes for pubs and restaurants

Pubs and restaurants will be granted fast-track planning permission to serve takeaway hot food and drinks. This measure is intended to help these businesses survive at a time when customers have been advised to stay at home.

Retail, hospitality and leisure industry business rates

Clients in the retail, hospitality and leisure industries that pay business rates will not have to pay these rates in the 2020/21 tax year and will potentially be eligible for a £25,000 grant. It’s not yet clear how clients will be able to access this grant but we’ll provide information as soon as it becomes available.

Small business rate relief

Clients with smaller businesses that operate from properties with a rateable value of £15,000 or less (making them eligible for small business rate relief) will be entitled to a grant of up to £10,000 each. This is an increase from the £3,000 grant announced in last week’s Budget. The grant will also be available to businesses that qualify for rural rate relief. Businesses do not need to apply for these grants; their local authorities will contact them directly.

Coronavirus Business Interruption Loan Scheme

The Coronavirus Business Interruption Loan Scheme, announced last week in the Budget, has now been extended to offer loans of up to £5 million, with no interest due for the first six months. At the moment, we aren’t privy to a huge amount of information about what the scheme will entail. However, the government’s website currently refers to it as a scheme to “support long-term viable businesses who may need to respond to cash-flow pressures by seeking additional finance”. The temporary Coronavirus Business Interruption Loan Scheme will be delivered by the state-owned British Business Bank and according to the bank’s website, the loans should be available from 23rd March.

Support for the self-employed

Sadly, no specific support has been announced for the self-employed, who cannot access the Statutory Sick Pay reclaim announced in the Budget. We’re monitoring developments we’ll let you know if the situation changes.

Budget, DMS Posts, Tax

Summary of Budget 2020: Key points at-a-glance

Here is a summary of the main points.

Coronavirus and public services

  • £5bn emergency response fund to support the NHS and other public services in England
  • All those advised to self-isolate will be entitled to statutory sick pay, even if they have not presented with symptoms
  • Self-employed workers who are not eligible will be able to claim contributory Employment Support Allowance
  • The ESA benefit will be available from day one, not after a week as now
  • £500m hardship fund for councils in England to help the most vulnerable in their areas
  • Firms with fewer than 250 staff will be refunded for sick pay payments for two weeks
  • Small firms will be able to access “business interruption” loans of up to £1.2m
  • Business rates in England will be abolished for firms in the retail, leisure and hospitality sectors with a rateable value below £51,000
  • £6bn in extra NHS funding over five years to pay for staff recruitment and start of hospital upgrades

Personal taxation, wages and pensions

Pay slip
  • The tax threshold for National Insurance Contributions will rise from £8,632 to £9,500
  • The move, first announced in November, will take 500,000 employees out of the tax altogether
  • Those earning more than £9,500 will be, on average, £85 a year better off
  • 5% VAT on women’s sanitary products, known as the tampon tax, to be scrapped
  • No other new announcements on income tax, national insurance or VAT
  • Tax paid on the pensions of high earners, including NHS consultants, to be recalculated to address staffing issues

Alcohol, tobacco and fuel

Man paying for a pin of beer
  • Fuel duty to be frozen for the 10th consecutive year
  • Duties on spirits, beer, cider and wine to be frozen
  • Tobacco taxes will continue to rise by 2% above the rate of retail price inflation
  • This will add 27 pence to a pack of 20 cigarettes and 14 pence to a packet of cigars
  • Business rate discounts for pubs to rise from £1,000 to £5,000 this year
Men and a woman with laptops
  • System of High Street business rates to be reviewed later this year
  • Firms eligible for small business rates relief will get £3,000 cash grant
  • Entrepreneurs’ Relief will be retained, but lifetime allowance will be reduced from £10m to £1m
  • £5bn to be spent on getting gigabit-capable broadband into the hardest-to-reach places
  • Science Institute in Weybridge, Surrey to get a £1.4bn funding boost
  • An extra £900m for research into nuclear fusion, space and electric vehicles
  • VAT on digital publications, including newspapers, e-books and academic journals to be scrapped from December

Environment and energy

Plastic bottles
  • Plastic packaging tax to come into force from April 2022
  • Manufacturers and importers whose products have less than 30% recyclable material will be charged £200 per tonne
  • Subsidies for fuel used in off-road vehicles – known as red diesel – will be scrapped “for most sectors” in two years’ time
  • Red diesel subsidies will remain for farmers and rail operators
  • £120m in emergency relief for English communities affected by this winter’s flooding and £200m for flood resilience
  • Total investment in flood defences in England to be doubled to £5.2bn over next five years
  • £640m “nature for climate fund” to protect natural habitats in England, including 30,000 hectares of new trees

Transport, infrastructure and housing

Traffic on the A303 near Stonehenge
  • More than £600bn is set to be spent on roads, rail, broadband and housing by the middle of 2025
  • There will be £27bn for motorways and other arterial roads, including new tunnel for the A303 near Stonehenge
  • £2.5bn will be available to fix potholes and resurface roads in England over five years
  • Further education colleges will get £1.5bn to upgrade their buildings
  • £650m package to tackle homelessness, providing an extra 6,000 places for rough sleepers
  • Stamp duty surcharge for foreign buyers of properties in England and Northern Ireland to be levied at 2% from April 2021
  • New £1bn fund to remove all unsafe combustible cladding from all public and private housing higher than 18 metres

DMS Posts, Tax

An essential IR35 briefing for contractors

IR35 legislation allows HMRC to collect additional payment from contractors in certain circumstances. The way in which IR35 operates in the private sector is set to change and this could have a significant impact on many contractors across the UK. This guide provides an overview of IR35 legislation and what it means for all contractors, along with an explanation of the anticipated changes in the private sector.

What is IR35?

IR35 is a piece of legislation designed to seek additional payment from contractors who HMRC believes are working in “disguised employment”. This is when a contractor’s working arrangements and contract are similar to those of an employee but, unlike an employee, the contractor enjoys the tax benefits of working through an intermediary, such as a company or partnership. When a contractor meets the criteria of disguised employment, they are deemed to be “inside IR35” and are required to make additional payments to HMRC.

When is a contractor deemed to be “inside IR35”?

The question of whether a contractor is deemed to be inside IR35 depends on a variety of factors relating to both the contract itself and the contractor’s working practices. There are three employment tests designed to help contractors and engaging organisations make this assessment, along with a number of additional factors that HMRC takes into consideration.

The employment tests

The “direction, supervision and control” test

This test focuses on the level of autonomy given to the worker. HMRC considers contractors to have more autonomy when it comes to choosing what work they do, while employees are more likely to be assigned tasks by their employer. This does depend on the individual’s skill and expertise, however, as a highly skilled employee is likely to enjoy a greater degree of autonomy than a less experienced contractor. The “direction, supervision and control” test asks the following questions of a contractor’s working practices and the wording of the contract itself:

Direction: is the worker told how to do the job at hand?

Supervision: is the worker supervised while they carry out their work?

Control: does the engaging organisation have control over aspects of the worker’s working practices, such as their work schedule?

If the answer to any of these questions is “yes”, then there’s a chance that the contractor might be inside IR35.

The “substitution” test

The test of substitution considers whether the engaging organisation would be prepared to accept someone else to do the contractor’s work in the event of them being unavailable. If the engaging organisation would not be prepared to do this and would only accept the personal service of that particular contractor, it would suggest that a traditional employment relationship exists and that the contract could therefore be inside IR35.

The “mutuality of obligation” test

Mutuality of obligation (MOO) means that one party – the employer – is obliged to provide work and the other party – the employee – is obliged to accept it. Unlike employees, contractors have no obligation to accept work and unlike employers, the companies that contract them have no obligation to provide it. As MOO is a feature of an employment relationship, if it is present in a contract it suggests that the contract might be inside IR35. When assessing a contractor’s working practices and contract, there are certain factors that would indicate that MOO isn’t present and that an employment relationship, therefore, doesn’t exist. These include:

• the use of specific projects with set end dates

• the ability for either party to stop the work with very little notice

The ‘CEST’ checking tool

HMRC developed the Check Employment Status for Tax (CEST) tool to help contractors and the companies who engage them to check whether a contract and the contractor’s working practices fall inside or outside IR35. However, some questions were raised relating to the initial version of this tool and its exclusion of the mutuality of obligation test. An updated version of the CEST tool was released in November 2019.

Additional factors that might affect a contractor’s IR35 status

HMRC doesn’t just consider the outcome of the three employment tests when assessing a contractor’s IR35 status. It looks at a wide range of factors that might indicate that the contractor is “part and parcel of the organisation” and that a traditional employment relationship might, therefore, be in place. These factors include:

• the contractor having an email address at the engaging organisation

• the contractor having permission to use company equipment

• the contractor receiving the same company ‘perks’ as their employed colleagues

• the contractor being line managed in the same way as their employed colleagues

What are the consequences of being inside IR35?

Contractors who are inside IR35 and work through an intermediary in the private sector are currently required to declare this to HMRC. If the intermediary is a limited company, the company would add a deemed payment in the contractor’s salary and deduct tax and National Insurance accordingly. If the intermediary is a partnership, the partnership would work out the deemed payment and deduct tax and National Insurance in the same way. The partner would then report this amount on their individual Self Assessment tax return as if it were income from employment.

If a contractor fails to declare their IR35 status and HMRC challenges this in an investigation, the contractor may face a penalty. Penalties are levied as a percentage of the additional tax that the contractor is liable to pay and are determined by HMRC’s perception of the contractor’s intent and the degree to which they “failed to take reasonable care” to declare their IR35 status. If a contractor knows that they are inside IR35 but chooses not to take action, they are likely to be fined more than if they had simply made a mistake in failing to declare their IR35 status. In the public sector, the onus is on the engaging organisation to assess the IR35 status of its contractors. Anyone who the engaging organisation deems to be inside IR35 is usually brought on to the organisation’s payroll as an employee and is then taxed accordingly.

Whose responsibility is it to determine if a contractor is inside IR35?

IR35 was first introduced to all contractors in 2000. At first, it was the contractor’s responsibility to determine whether they were inside IR35 but in 2017, the government rolled out changes to IR35 rules in the public sector which put the onus on public authorities to decide whether their contractors are inside or outside IR35. In the private sector, it’s currently the contractor’s responsibility to determine if they are inside IR35. However, anticipated reforms to IR35 in the private sector mean that for large or medium-sized companies, the onus will soon be on the engaging organisation to make this assessment. It’s expected that the new rules – currently sitting in draft form in the Finance Bill 2019/2020 – will be introduced in April 2020.

Who will the new rules affect?

The new IR35 rules affect contractors who provide services to large or medium-sized companies in the private sector (defined in the draft legislation as having a turnover of more than £10.2 million and more than 50 staff) and who operate through an intermediary, such as a company or partnership.

What impact will the new rules have?

Once the new rules are introduced, if a large or medium-sized private sector company deems a contractor who is working through an intermediary to be inside IR35, the company will have a decision to make. It could either change the contractor’s working arrangements in such a way that the contractor is no longer inside IR35 or it could terminate the contract. If the company wants to continue engaging the services of the contractor, it could pay them through its payroll instead. In this scenario, the contractor would become an employee of the engaging company and would have to make the same tax and National Insurance contributions as other employees. When similar reforms were introduced to the public sector in 2017 The Register reported a “mass exodus” of IT contractors from the public sector, while other news sites claimed that IR35 had made it extremely hard for the public sector to hire for contract roles. However, a report commissioned by HMRC contradicts the news reports, claiming that the change was not substantial and that IR35 had not affected the public sector’s ability to fill contract vacancies.

DMS Posts

Late filing statistics from Companies House.

With latest figures published by Companies House showing an increase of 2% in accounts being filed late for 2018 (as compared with 2017), we thought it was worth reminding you of the fines that companies could face:

Accounts delivered late Penalty: Private company/LLP Penalty: PLC
< 1 month £150 £750
> 1 – 3 months £375 £1,500
> 3 – 6 months £750 £3,000
> 6 months £1500 £7,500

According to Companies House, 223,640 companies (4,202,044 total on register) were late to file their accounts, with the worst areas being London, Birmingham and Manchester.