Understanding IR35
IR35 is the short version of the UK tax legislation that is designed to identify contractors and businesses who avoid paying the appropriate tax by working as masked employees – or those who have self-employed workers who mask their true employment status. The legislation was supposed to be put into action in April 2020. However, due to the current Covid-19 pandemic, the government postponed this. It is now expected to become law in April 2021.
IR35 rules assess whether or not someone who is working for a business as a contractor is fulfilling the same role as an employee in that business. If it is deemed that a contractor is performing the same role as an employee, they are considered to be ‘inside IR35’.
If a contractor is considered to be inside the IR35 category, HMRC then surely categorises them as an employee and ultimately deems them liable to pay Income Tax and National Insurance.
Public and Private sector changes
In 2017, for the public sector, individual responsibility for determining tax status completely shifted from themselves to the organisation employing that individual. This meant that most public sector organisations determined that the majority of their agency workers (including most nurses) fell inside the IR35 bracket. They would now be categorised as ‘employed’ for tax purposes.
Post-April 2021, the government rules will be applicable in the private sector too for companies deemed to be large or medium-sized. Large or medium-sized meant any business with more than 50 employees and with a revenue of more than £10.2M. Most care homes would belong under the ‘large group’ category.
Potential Impacts of IR35 for Nursing & Care Agencies
If caught by IR35, the ‘deemed employees’, the ‘contractors or intermediary’ (meaning the limited company the employee sets up), and the firms hiring them (in this case the Nursing & Care Agency) have to pay income tax and NICs.
The financial impact of IR35 can be significant as it can reduce the worker’s take-home pay by up to 25%, costing the typical limited company contractor (and the agency that employs the contractor) thousands of pounds in additional income tax and NICs.
As the care agency sector is already operating on thin margins – especially in the private sector – the potential impact of IR35 could be catastrophic for them. Their long-term survival post-IR35 has been thrown into doubt. Many agencies will fail to operate as a viable and profitable business if adequate measures are not put in place.
Here are 7 steps that can help to overcome any 1R35 impact on your business
- Avoid coming under HMRC radar negatively – To stay on the right side of the law, you should take care to properly audit your employment practices – and make sure that all your temporary and contract staff are within IR35.
- Negotiate better rates from your clients – Since your employment costs are going to go up by at least 25% for the temporary staff, try to negotiate better rates for your business from your suppliers – whether they are hospitals, care homes, or the local council. It is a task that is easier said than done. Chances are that some of your suppliers may not entertain these requests, as they themselves are under increasing pressure to keep costs down. Nevertheless, you may find some understanding suppliers who are prepared to work with you here – after all, it’s in their own interests that you remain in business and continue to operate for profit.
- Adopt cost-saving measures for your business – Streamline your business operations to maximise your profit. This is where many businesses are failing. There are some areas where businesses can minimise waste and tackle excessive spending. You need to make sure that each area is as efficient and highly optimised as possible if you are serious about meeting your ongoing business needs.
- Improve efficiency by going digital – Agencies can easily make use of care agency software like 20X to automate a lot of mundane business activities like staff documentation, timesheet management, invoice creation, and other details. There are examples of agencies that adopted modern agency management software and saved thousands on their budget by cutting down expenses massively.
- Inform and train your employees to determine accurate IR35 status – Gather ample information to understand IR35 status. All businesses need to showcase how they have taken reasonable care in their assessments. HMRC will look at the size of the business and assess how much time, effort, and cost they have put into getting this right.
- Consult an accountant or an expert in IR35 – You can use HMRC’s online tool Check Employment Status for Tax (CEST) to know for sure whether a worker should be categorised as the company employed or self-employed for tax purposes.
Use care agency software tools to help make process changes according to IR35 – Consult with care agency software providers like 20X to see and understand how it would be updated in their systems to reflect the change within the legislation.
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