Gary Lineker often makes headlines with his controversial statements on social media and his most recent controversy left him at odds with the BBC, fighting for his job on Match of the Day. But this isn’t the first time that his position with the broadcaster has come into question.
In 2017, Lineker entered into a six-year legal battle about his employment status, arguing that he was not liable for £4.9 million in unpaid tax.
The case revolved around IR35 tax rules and whether the presenter was a full-time employee of the BBC and BT Sports, or a self-employed contractor. HM Revenue & Customs (HMRC) claimed that he should have been paying taxes as an employee, while the 62-year-old maintained that he was an independent contractor and had already paid the correct amount.
Ultimately, the courts ruled in Lineker’s favour, and he did not have to pay. But when fellow TV presenter Eamonn Holmes found himself in a similar position, the courts ruled the other way and he was liable for £250,000 in unpaid tax.
The different ruling between the two cases highlights an issue that many business owners have – IR35 tax rules are rarely straightforward, and mistakes can be very expensive.
Indeed, there has been a debate about the IR35 tax rules since their introduction in 2000, particularly following the amendments in 2017 and 2021 which mean that employers are now responsible for determining the employment status of contractors they hire.
Unfortunately, this can sometimes lead to businesses being over-taxed if they make a mistake.
The good news is, FTAdviser reports that HMRC are considering an overhaul of the rules to potentially help businesses avoid this.
However, the changes have not yet been confirmed and, if your business uses contractors, it may be a good idea to make sure you understand how these tricky tax rules could catch you out.
Here’s how IR35 tax rules currently work and what the proposed changes could mean for your business.
Mistakes with IR35 could mean you pay too much tax
The IR35 tax rules – also called “off-payroll” tax rules – determine whether a contractor is working as an employee for tax purposes. If they are “inside IR35”, you must deduct Income Tax and National Insurance contributions (NICs) from their fee in the same way as a full-time employee.
If they are not inside IR35, it is their responsibility to pay their own Income Tax and NICs through self-assessment.
Initially, it was down to the contractor to decide their own status. However, since 2017 for public companies, and 2021 for medium and large private companies, it has been the responsibility of the business that is hiring them.
This can cause problems for you because, if you make a mistake, your business is liable to pay the Income Tax and NICs out of your own pocket, essentially meaning that you are over-taxed.
Unfortunately, many businesses fall foul of the rules and incur significant costs as a result. That’s why many companies are cautious about working with contractors.
Indeed, according to IPSE, 28% of UK businesses have decreased the number of contractors they use since the changes came into effect in 2021 as they fear being over-taxed. This is a significant problem considering 49% of businesses say that contractors are essential for growth.
That’s why HMRC are proposing changes that would reduce the risk for businesses and encourage them to work with contractors.
Proposed IR35 changes may stop you from being over-taxed
HMRC recently released details of proposed changes to IR35 tax rules to gauge the response from businesses.
The changes, among other things, would allow you to offset tax that has already been paid. Essentially, this means that if you wrongly classify a contractor and they pay their Income Tax and NICs through self-assessment, HMRC can then offset this amount, so you do not have to absorb the cost.
If the proposed reforms go ahead, this could be very beneficial for your business. But there are no guarantees, and you may still need to check the way that you classify contractors in the meantime.
Avoid mistakes with IR35 by following 3 key principles
Until HMRC decides whether to go ahead with proposed changes or not, wrongly classifying a contractor as outside IR35 could cost you.
Fortunately, you may be able to avoid mistakes by following three key principles for classifying a worker:
- Supervision and direction – how much direction and control does the business have over the contractor?
- Substitution – is the contractor required to carry out the work themselves or can they send somebody else in their place?
- Mutuality of obligation – are you obliged to offer the contractor work and are they obliged to accept it?
Answering these questions can help you more accurately determine whether a contractor is inside IR35 or not.
However, it is important to remember that each case is different and the situation is not always black and white. As such, it may be sensible to seek advice if you are unsure about IR35 tax rules.
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Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.