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Employer's beware: Government announces changes to IR35

30 October 2018

The Chancellor, Phillip Hammond, has just delivered his latest budget and with it, a significant change to the way liability for IR35 breaches will be dealt with for private sector companies from April 2020.

IR35 applies when a self-employed individual contracts with a client via a limited company. The client pays the limited company and in turn the limited company pays the individual. One of the benefits of this is that it typically attracts less tax. HMRC is therefore keen to make sure people using IR35 are genuinely self-employed and are not 'disguised employees' using the system to reduce their tax burden.

Presently, if the parties in the private sector get that 'wrong' the liability rests with the limited company. However, with effect from April 2020, mirroring a change that has already been implemented into the public sector, that liability will instead rest with the client for business of a certain size. This places responsibility on the client to make sure that the individual they are contracting with is genuinely self-employed. If not; they are exposed to potentially significant liability in respect of tax and Employment Tribunal claims.

This represents a further blow for employers following a recent string of cases where individuals were said to be employees or workers.

Now is an excellent time to audit your use of contractors generally, whether they operate via a limited company or not. This is not just a question of looking at what the contract says. This is important; but the 'day to day reality' of the relationship is the most important consideration.

Watch James Tait's coverage of the changes to IR35 in his In House Lawyer update.

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