Are your contractors disguised employees

What is a disguised employee? Very definitely, it is not an individual holding a clock card in fancy dress. It is contractor, usually in the guise of a limited company, that is undertaking work as if an employee, but more importantly, is being paid as a business contractor: this saves the “employer” paying National Insurance and gives the employee/contractor opportunities to apply some useful tax planning.

What do HMRC make of this?

Unsurprisingly, HMRC were not enamoured of this tactic and way back in 2000 they introduced the notorious IR35 legislation. In effect, IR35 dictates that where certain criteria are met the contractor has to treat his income from contracts where he or she is basically an employee, as if they were a salary, thus precluding any tax or NIC advantages for the contractor.

The problem with IR35 is the definition of the “certain criteria” that contractors need to follow in order to decide if a contract falls under IR35 or not.

A shift in emphasis

HMRC have lost numerous tax cases since 2000 on this issue, and clearly the revenue they were gaining hardly matched the costs of chasing contractors to comply.

Their solution seems to be to shift the responsibility for deciding if a contractor should be treated as a de facto employee, from the contractor to the “employer”.

Public Sector Bodies (PSBs) were the guinea pigs for this change in emphasis.

Following the apparent success of shifting the responsibility for a decision – if a contractor was, or was not, a disguised employee, to PSBs – HMRC have now resolved that this system will be rolled out to the private sector.

Who will be affected and when?

Draft legislation is expected by September 2019, and HMRC have intimated that the legislation will only be applied to medium and large companies – the 1.5m small companies will be exempt.

There is no doubt that shifting the responsibility for deciding if an engager/contractor is an arms-length commercial arrangement or disguised employment will likely be as problematic as the existing IR35 regulations.

We will be keeping a keen eye on these changes and will report back as they unwind later this year.

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