IR35 is a set of tax legislation designed to combat tax avoidance by workers and clients employed via an intermediary or an agent, also known as off-payroll working. The question to ask is, “if the intermediary did not exist, would the worker be classed as an employee”. If the answer is “Yes”, then the worker must be classified as an employee rather than a contractor.
The benefit to the client of hiring a contractor includes not having to pay National Insurance (NI) contributions, income tax, pensions, holiday and sick pay and hence it is a huge saving on the cost of employment to the end client. However, the contractor maybe on the PAYE scheme of the intermediary. If the contractor is self-employed, payment is made without deducting NI contributions and income tax and this could be beneficial as some of the costs can be off-set as tax is paid on profit only. However, a self-employed person loses out on sick, holiday and maternity pay and also does not have employment security and only gets paid for the work they do, as has been the case over the past year due to the Covid-19 pandemic.
IR35 name comes from the Inland Revenue (now HMRC) press release number which originally publicised the new tax laws.
The IR35 rules apply only to medium and large companies that meet any two of the following three conditions:
- Turnover greater than £10.2m
- Balance sheet total greater than £5.1m
- 50+ employees.
The new IR35 rules which are applicable from 6th April 2021 require the end client to determine the employment status of every worker instead of the contractor. The end client needs to provide a Status Determination Statement (SDS) to the worker or the organisation with which the contract is held. The SDS decides who is responsible for paying income tax.
The law requires the Transport Manager(TM) to have a “genuine link” to the company, either as a licence holder, partner, director or an employee. The Traffic Commissioner (TC) will look for the genuine link evidence and if satisfied, will class a person as an employee and not self-employed.
The law allows for an appointment of external TM who is under contract. Statutory Guidance Document 3 (SD3) says that an external TM must be directly contracted and not through an intermediary and hence is genuinely self-employed. However, SD3 directs that no external transport manager is responsible for more than 50 vehicles, across no more than four operators. If the company operates 50 vehicles, then the external transport manager can only work for that one company.
The employment of drivers is another area where self-employment status may be relevant. According to HMRC, self-employment is unlikely to be demonstrated unless the driver is an owner-driver with their own operators’ licence.
Agency drivers do not meet the self-employment criteria and are employed by the agency. Driver classified as self-employed should have a degree of autonomy in their work schedule, be able to send a replacement driver if they are unavailable, and accept financial risk. Owner-drivers with their own O-Licence may be considered as genuinely self-employed. However, if they work solely for one client over a long period of time, it may be viewed by HMRC as disguised employment and may incur possible penalties for both parties.
Employers can use Check Employment Status for Tax (CEST) tool from HMRC to check the tax status of its workers.
Drivers on Demand’s drivers are all employees on the PAYE under full employment contract.
Click on this link for further information on IR35
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