Quite often, new startups are one person working on their own, but if the new venture is successful, it can be quite soon where the owner needs to draft in some help. The burdens of being an employer are quite onerous and complex and this can deter many new business owners from taking the step of employing people.
Some try to get around being responsible for sick pay, maternity pay, holiday pay and all the other things that come as being part of employing people by claiming their staff are self-employed. HMRC are used to this ploy and they have laid down criteria which workers must fit to be self-employed. From April 2020, these rules will be adhered to more strictly than ever, and they are placing the onus of establishing employment or self-employment onto the main contractor that gives out the work.
Read on for some information to help make IR35 clearer.
Anti-Avoidance Tax Legislation – IR35
IR35 is the UK’s anti-avoidance tax legislation which is designed to prevent people from forming limited companies and being paid gross for the work they do when they should be an employee. They could then take their money from the company as dividends. As these are not liable for national insurance, this is a loss to the treasury. However, it is not just limited companies that were used to try and avoid liabilities.
As an employer, on top of any salary paid, you also have to pay employers national insurance for anyone earning more than £155 per week in the current tax year (2019/2020). At present, that is set at a rate of 13.8%, which can add a lot of money to your wage bill. By claiming the workers are all self-employed, this extra charge is avoided, and there is no responsibility for maternity pay and leave, sick pay or pensions, among other things.
Are Your Workers Employed?
If you answer yes to just a couple of the following questions, your workers should be employed.
- Do you pay them a set amount of money per hour, day, week or month?
- Do you control where and what work they are doing?
- Can you move them from job to job when it suits you to?
- Do you provide all their tools and equipment?
- Do you pay them for extra time worked?
If your workers fit the above criteria, HMRC will insist they are employed and will fine you heavily if you try to claim they are self-employed.
Are Your Workers Self Employed?
To establish if your workers can be self-employed, let’s analyse each of the above questions.
- To be self-employed they have to be paid a price for a job, regardless of how long it takes them to complete it.
- You cannot control the hours they work, the work they are doing or the place of work.
- You cannot move them from job to job, it is up to them to decide what work they do.
- They should supply their own tools and equipment.
- It helps the case for claiming self-employment if they work for more than one business, although that is no guarantee of acceptance by HMRC if they do not fit the rest of the criteria.
The Impact on Your New Startup
Although these rules have been in place for a very long time, the onus will now be on you to prove self-employment and you will no longer be able to leave it to the workers to make that decision. Cost-wise, this could mean larger tax bills for your company and when you are deciding how much to pay a new member of staff, you should take all the costs such as the employer’s national insurance into account.
HMRC can charge penalties and interest equal to 100% of the tax they think they have lost, and although they do not usually go that high, they may well be more inclined to with the stricter rules for IR35.