Wake-up call: What is a ‘disguised worker'?

IR35 is tax legislation that was brought into force to tackle tax avoidance by workers who provide a service through an intermediary, yet are eectively an employee.

By using an intermediary, it means contractors pay tax and national insurance contributions (NICs) at a lower rate because they pay through their business, rather than as an employee.

IR35 has been part of the law since 2000, so it's not new legislation, but it is about to undergo significant changes that will have an impact on hospitality businesses that use contractors.

From April 2020, the current IR35 legislation in the private sector will be replaced with off-payroll tax.

It means that from April 2020, contractors who are deemed to be ‘disguised workers' by the government, will have to pay the same income tax and NICs as employees.

Expert advice

So, who's deemed to be a disguised worker? As a provider of services, contractors are responsible for their own sick pay, holiday pay, pensions and taxes. They will often work alongside the rest of the team, work the same hours, but they still wouldn't be classed as employees.

This is where the government is determined to divide those who are ‘disguised workers' and those who aren't – but the lines are blurred. It's not easy to dierentiate the two, especially in an industry like hospitality.

A ‘self-employed' chef will cook meals in the kitchen alongside a full-time chef and possibly work the same hours. There just isn't another way to do the role. But it will be up to finance and HR leaders to demonstrate the IR35 status of each of the contractors they employ.

One of the best ways to ensure compliance between those two departments is to have a strong financial management system in place that allows data from across the business to be inputted and shared seamlessly.

Your system will need to be able to show visibility of employee, supplier and financial data with an off-payroll function to accurately assess what your employees' national insurance contributions might look like. Check with your current finance software provider to see if your system has these capabilities if you're unsure.

Checklist

If you're a finance leader in your business, here are some questions you'll need to ask when determining a contractors' IR35 status:

• Who is responsible for controlling their work?
• Is the contractor obligated to complete their work?
• If they can't, can they find a replacement within the business to do so?

Strategic analysis is crucial to forward planning. Because of the changes in IR35, contractor fees have gone up to oset their increase in tax. Using the data you already hold can help prepare for the potential increase in costs.

While the finance department will take careof strategy, it will be up to the HR department to demonstrate compliance in practice. They will need to do a full audit of all contractors to fully understand their relationship with your business, looking at what they're responsible for, how their fee or salary is paid, expenses and company perks, like a mobile phone.

Once all this information is gathered, the best place to start is the Check Employment Status for Tax (CEST) tool.

Beware!

The penalty for businesses not complying with IR35 has yet to be made clear. For contractors in the public sector who are found to be inside IR35, they can be made to pay up to 25% more tax and NICs. So, it's clear for businesses that they won't get off lightly.

Steve Berridge is director of the Access Group's financial management software division

accessfms@theaccessgroup.com