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:
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.
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).
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.
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.