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HR: Frontline in IR35 Disguised Employment Rules


The Government aims to catch contractors who do not pay the right taxes under IR35 disguised employment rules. Darren Hayward, an employment lawyer, informs that this will make HR responsible for the determination of the employment status.


HR departments find it challenging in determining whether a person is an employee or is self-employed. Employers must have the correct employment status as this has implications on treating each contractor for tax, national insurance, pensions, and employment law.


The Government has acknowledged that it has failed to apply existing rules. Thus, HR will be on the frontline in the fight against disguised employment. The changes are meant to check the individuals’ employment taxes who work through intermediaries.


What made the Government change the rules on IR35?


HM Revenue and Customs (HMRC) was tasked with taking charge of at least 230 tax evasion inquiries per annum into contractors and freelancers. This gradually decreased through the years. Thus, the cost of running these inquiries exceeds any tax gain.


HRMC has to deal with IR35 inquiring that require the accumulation of evidence. This involves contracts both from the organizations and the personal service companies these contractors work for.


HRMC has to check whether the contract is reflected in the daily working of the contractors. Inquiries regarding employment status are complicated and is dependent on eyewitness testimony. Thus, it makes it difficult to prove that a person is an employee or not.


Possible solutions in determining employment status


One possible solution in determining employment status is a statutory employment test. An 80% test could be used in this test. If a freelancer or contractor obtains 80% or more of his/her income from one source, then that person is an employee of that company.


Another possible solution is to consider that a person engaged with a company for more than six months would be deemed an employee of that company. A statutory test would have a great impact on the flexible workforce of Great Britain as many contractors and freelancers obtain their income from one source and are engaged by the same end-user for years.


How did the new rules affect employers and HR?


The new rules that took effect April 2017, shifted the responsibility of compliance with IR35 rules from freelancers and onto engagers. HR managers in the public sector will be responsible for the contractors that are self-employed. If the number of engagers is less than contractors, the tax collection will be simpler.


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