7 December 2021
Potential Scope Increase With IR35
HMRC are clamping down on tax avoidance with their introduction of the IR35 tax legislation aimed at businesses who provide services similar to that of an employee, but through an agreement with a limited company rather than an employment contract. It is expected that this clamp down will soon look beyond limited companies and challenges of status will be made of sole traders as well.
An individual is considered to be an employee if the way they work is controlled by an employer, for example, which days and hours they are expected or allowed to work. If this is the case, then the individual should be covered by employment law and should be entitled to the rights permitted under that law such as paid holiday, a notice period and payment for redundancy.
Some businesses are thought to be avoiding these laws by having the individual register as self-employed, which is known as false self-employment. The employer is not only able to avoid having to give the worker the benefits mentioned but is also not required to pay Employer National Insurance Contributions or make employer contributions into a pension scheme.
With an estimated five million self-employed in the UK, many of whom might be falsely self-employed, a further clamp down should not only generate additional revenue for HMRC, but also go towards ensuring workers' rights are protected. The words "self-employment", "freedom" and "be your own boss" go hand in hand and the benefit of freedom is balanced by the risks involved.
As a self-employed person, you do not have the protection of employment law and you are responsible for finding your own work and managing your taxes and other obligations yourself. However, you are also supposed to be able to set your own working hours, take time off when you like and state your own prices. If any of these benefits are out of your control, you could be considered an employee and should be given the benefits an employee enjoys in return.
You will find differing opinions about IR35. Some believe that many businesses will be in breach entirely unknowingly due to a lack of clarity and advice from the government and that the rules are deliberately complicated and non-specific in the hope of catching people out and to maximise tax revenue.
It is further argued that individuals have limited knowledge and understanding of tax issues and do not always have the resources to investigate fully or to obtain professional advice. Others argue that it is not up to the government to signpost businesses towards appropriate legislation and, instead, that businesses have a responsibility to seek out relevant information and ensure they are working within the law.
However, whilst liability would remain with the business or individual, it is good practice and customer service for those professionals who advise them to make them aware of factors which might affect them. Accountants and tax advisers, for example, should be aware of laws which might affect their clients' tax affairs, even if they do not have a detailed knowledge of them.
A professional who is compensated for providing a service should be expected to provide a good service, so as not to bring their profession into disrepute. A financial advisor who failed to advise a client about relevant financial matters would not be providing a professional service and the client would quite rightly ask "what am I paying for?"
Any professional advising a client on employment matters should be aware of IR35 and make their client aware of it also. As such, it is important for all parties to remember that those who are self-employed, as well as those working through a limited company, could be considered deemed employees and IR35 may apply.