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How do the IR35 rules affect smaller Housing Associations?

Andy Hamman, Director, Employment Tax
05/10/2021
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In previous editions of Foundations we have detailed the new IR35 rules which now affect medium and larger housing associations. However, do not assume that just because you are a small organisation you can ignore employment status.

We present a case study on how a smaller housing association would apply the rules.

Smaller is a small registered provider.. Smaller engages the services of Charlotte, an IT specialist, to provide IT services. Charlotte contracts with Smaller via her own limited company: CRS Ltd.

Smaller has an annual turnover of £8 million, 60 employees and balance sheet assets of £2 million.

The changes to the IR35 rules will only apply to medium or large organisations. A corporate entity, such as Smaller, will be medium or large-sized if it meets at least two of the following criteria for two consecutive financial years:

  1. turnover of more than £10.2 million
  2. a balance sheet total (assets) of more than £5.1 million
  3. an average of more than 50 employees

In this case, Smaller meets condition c, but not conditions a or b.

Smaller is not considered medium or large for IR35 purposes. Therefore, Smaller has no obligations under IR35 with regards to the engagement with Charlotte.

What happens if the individual contracts directly with Smaller?

Let’s say that Charlotte does not contract through her own company (CRS Ltd) and instead contracts directly with Smaller. In this scenario of direct engagement, Smaller have (and have always had) a responsibility to ensure that Charlotte is being treated correctly for tax and legal purposes.

The employment status principles are the same regardless of whether an organisation is considering IR35 or normal employment status. In reality, the question is whether or not Charlotte is working like an employee of Smaller. This is the same question that would be asked if Smaller was in scope of the IR35 changes from April 2021.

In this scenario (without a limited company), if Charlotte is working like an employee, HMRC are entitled to seek back taxes from when Charlotte started her engagement with Smaller (the number of years they can go back will depend on whether the error is reasonable, careless or deliberate).

Determining employment status

In the scenario of Charlotte contracting directly with Smaller, Smaller will have to determine whether Charlotte should be an employee or is self-employed. To do this, Smaller must consider the employment status rules, which are captured by case law principles, or ‘factors’. When doing so, they must consider the contractual terms and the reality of the working arrangements.

The contractual terms and arrangements.

  • Charlotte cannot substitute (and pay) someone else to deliver the work –Smaller require her to do the work.
  • Charlotte reports to the Head of IT, who is an employee of Smaller. The Head of IT checks and reviews Charlotte’s work before it is implemented and undertakes quarterly performance reviews.
  • Charlotte charges an hourly fee for her services.
  • Charlotte uses a Smaller email address and usually works from the Smaller’ offices with other Smaller employees, but Smaller do allow her to work from home when she wants to.
  • Charlotte isn’t contracted for a set number of hours, but usually works 5 days a week for around 30-40 hours. She does not provide other similar services on a self-employed basis.

Considering the working arrangements

  • There is personal service as Charlotte has to perform the work herself.
  • While she isn’t controlled day-to-day, there is an underlying right for Smaller to move her from task to task and step in to check her work. They can also tell Charlotte where to carry out the work, even if they allow her to work from home when she likes.
  • The hourly fee remuneration structure does not provide Charlotte with the opportunity to benefit or lose out if she completes the work more or less efficiently than she anticipates.
  • Charlotte wouldn’t be presented to customers or suppliers of Smaller, but she is integrated into the organisation of Smaller given her email address and position within a line management chain.
  • Charlotte does not have a business structure or provide similar services to other clients.

Weighing up these factors in the round, it is clear than Charlotte is working like an employee of Smaller. Therefore, Charlotte would/should be an employee for tax purposes if she were directly engaged by Smaller. Therefore, even though the IR35 rules do not apply to Smaller due to their size, they are still obliged to consider employment status for any workers with whom they contract directly.

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Andy Hamman
Andy Hamman
Director, Employment Tax
London