A different kind of gig…
The gig economy, characterised by short-term contracts and freelance work as opposed to permanent jobs, has been increasingly influential across various sectors, including STEM (Science, Technology, Engineering, and Mathematics) in the UK. IR35 legislation in the UK is designed to determine whether a contractor is genuinely self employed or a “disguised employee” for tax purposes. For those working in the STEM sector, it affects how businesses engage with contractors and freelancers alike. There are a number of considerations for organisations within the STEM sector related to IR35 in the gig economy within the sector.
Why is there a prominent gig economy within STEM?
STEM professionals often possess highly specialised skills and expertise that are in demand across various industries and projects. This makes them well-suited for gig work, where they can leverage their knowledge to tackle specific tasks or projects on a short-term basis.
What is IR35?
IR35 legislation, often loosely termed the “Off-Payroll Working Rules,” is a tax law in the United Kingdom aimed at identifying and taxing individuals who work as contractors through intermediary companies, such as personal service companies (PSCs), but who could be considered employees for tax purposes. As mentioned above, the legislation was introduced to prevent “disguised employment,” where individuals work like employees but operate through intermediaries to reduce their personal tax liabilities.
Classification of Employment Status and the risks of misclassification
IR35 requires businesses to assess the employment status of contractors to determine whether they should be treated as employees (or workers) for tax purposes. In the gig economy, determining the employment status of STEM contractors can be complex. As a result, a number of factors will be considered by HMRC in determining whether the IR35 rules apply. These include the degree of control exerted by the so called client over the contractor and whether there exists a mutuality of obligation, something which involves the “employee” being required to perform the tasks they are allocated and the “employer” being obliged to provide the work and, on performance, pay for the work that has been done.
Misclassification of employment status can lead to financial penalties and tax liabilities for both contractors and so called clients. In the STEM sector, where contractors often provide specialised services on a project-by-project basis, accurately assessing employment status under the IR35 rules can be challenging. Contractors deemed “inside IR35” are subject to PAYE (Pay As You Earn) taxation, meaning that both income tax and employer and employee National Insurance contributions require to be deducted at source. This can reduce take-home pay considerably compared to operating outside IR35. STEM contractors may find their earnings affected by IR35 assessments, potentially impacting their financial viability and incentivising them to seek work outside the UK.
Client Compliance Obligations following 2021 Reforms
The IR35 landscape changed significantly with regard to public sector “clients” in 2017. Subsequently, further reforms were introduced in April 2021, resulting in “clients” in the private sector (excluding small companies, as defined under the Companies Act 2006) became responsible for determining the employment status of their contractors. This change placed the administrative burden firmly on the client where previously the responsibility lay elsewhere. Accordingly, all companies who engage gig economy contractors through an intermediary company are required to implement processes to assess employment status accurately and ensure compliance with their legal obligations under the IR35 regime.
Clients covered by the new rules are required to determine the employment status of any of their contractors. A decision on employment status should be made in respect of each distinct contract which has been agreed with either the contractor or agency or worker, and this should be communicated using a Status Determination Statement (SDS). This SDS must be passed to the contractor (and agency if applicable) and should contain the reasons for coming to a decision on employment status. Organisation engaging these contractors should also keep detailed records of any employment status determinations, along with the reasons for these decisions.
Therefore, whether or not the IR35 rules apply is determined by the terms and conditions and working practices of each contract. When making a status determination, the ‘Check Employment Status for Tax’ (CEST) service can be used to help clients decide if the IR35 rules apply.
Disputes over IR35 status determinations can arise between contractors, clients, and HM Revenue and Customs (HMRC). Legal challenges may involve appeals against IR35 assessments, claims for tax refunds, or disputes over employment rights and entitlements. A contractor who has been deemed an ‘employee’ will require to pay income tax and National Insurance contributions, therefore it is commonplace for contractors to appeal against assessments deeming them ‘inside IR35’. Nonetheless, STEM contractors and their clients must ensure compliance with IR35 regulations to avoid penalties and legal consequences. This may involve seeking professional advice, conducting IR35 status assessments, and implementing robust contractual and operational processes.
Here are some top tips for fulfilling your obligations under IR35:
- Understand IR35
Ensure that you have a good understanding of the IR35 rules and how they apply to your business. It’s crucial to understand the criteria used to determine whether a contractor should be classified as an employee for tax purposes.
- Assess Worker Status
Conduct thorough assessments to determine the employment status of contractors. This involves evaluating factors such as degree of control, abilities for substitution, and mutuality of obligation to determine whether the contractor should be classified as an employee or self-employed.
- Use HMRC’s Check Employment Status for Tax (CEST) tool
HMRC provides an online tool called CEST to help determine employment status for tax purposes. While it’s not mandatory to use CEST, it can provide valuable guidance in making determinations and the output can act as a Status Determination Statement.
- Engage with Contractors
Communicate openly and transparently with contractors about IR35 assessments and how they may be affected. Discuss any changes in status and the implications for their tax obligations.
- Review Contracts and Working Practices
Review existing contracts and working practices to ensure they accurately reflect the working relationship. Make any necessary adjustments to contracts to align with IR35 requirements.
- Provide Training
Educate relevant staff members about IR35 and their responsibilities in complying with it. Ensure they understand the implications of IR35 and how to properly assess worker status.
- Implement Processes
Develop and implement clear processes for assessing and managing IR35 compliance within your organisation. This may include documentation procedures, record-keeping requirements, and regular reviews of contractor engagements.
- Stay Updated
Stay informed about any changes or updates to IR35 legislation, HMRC may issue guidance or updates that could impact your compliance obligations, so it’s essential to stay abreast of developments in this area.
- Seek Professional Advice
Consider seeking advice from tax professionals or legal experts – they can provide guidance tailored to your specific circumstances and help navigate any complexities.
Overall, the 2021 changes to the IR35 rules present ongoing challenges for businesses which rely wholly or partly on the engagement of gig economy workers. Staying informed about IR35 reforms and seeking expert advice when needed can help businesses navigate these changes effectively. If you have any questions regarding this topic please contact a member of BTO’s Employment Team.
This update contains general information only and does not constitute legal or other professional advice.
Dawn Robertson, Partner & Accredited Specialist in Employment Law: dro@bto.co.uk / 0131 222 3242 / Connect with Dawn on LinkedIn
Kimberley Tochel, Trainee Solicitor: kto@bto.co.uk / 0141 221 8012 / Connect with Kimberley on LinkedIn
