IR35 | Should salon owners be worried?

What is IR35?

The IR35 tax rules (previously known as the “employment intermediaries” rules and more lately called “off-payroll working” by HMRC) apply when a worker supplies his/her personal services through a Ltd company or partnership to an end client.

In practical terms for example: a stylists works in your salon, barbershop, or spa but you pay them via their Ltd company (one that they have set up), rather than pay them directly (as you would do an employee, or self employed person).

Another example is where you have a ‘rent a chair’ arrangement with someone, but  the contract is between your salon and a Ltd company (one that they have set up).

These Ltd companies that they have set up are also known as personal service companies “PSC”.

By using such a PSC, the stylist opens up the tax advantages of a Ltd company and HMRC doesn’t like this because it knows it means less tax and national insurance can be collected from the person. The rules are therefore intended to ensure that individuals cannot avoid PAYE by routing their income via a PSC.

How does HMRC use IR35?

HMRC applies the IR35 rules in cases where they consider a person is “hiding” behind a PSC but is for all intents and purposes really an employee, or  self employed individual. Once HMRC get a whiff of this set up, they simply compare the person’s set up in practice against the HMRC ’employment status test for PAYE’ (called the CEST test) and if the person fails it, they consider them an employee.

The consequence is that HMRC would then go after the person behind the PSC for income tax and NIC owed.

At the moment, the burden is on the person behind the PSC (this being the person HMRC would go after) but things are about to change…

From April 2020

From April 2020, the onus to check the employment status of any possible IR35 situation and possibly who will need to back pay the PAYE moves to the ‘end Client’ – i.e. the salon owner; but for now, this only applies to medium and large sized businesses only. For small businesses, the onus remains with the PSC, at least for now anyway.

‘Small’ is defined as: 50 or less employees, turnover is less than £10.2million and their balance sheet shows £5.1million or less.

So pretty much all independent salons are exempt at the moment.

Should you be worried then?

For the vast majority of Salon owners, IR35 should not be a worry for now, for at least 1 of 2 reasons:

  1. it only applies if the salon has a contract in place (either in writing or in practice) with a PSC (for example a ‘rent a chair’ arrangement with an individual using a LTD company themselves;
  2. it doesn’t apply to small businesses (ie. you’re exempt as you have less than 50 employees, your turnover is less than £10.2million and your balance sheet assets are less than £5.1million).

But watch out for self employed individuals who don’t have a PSC

Although similar (but nothing to do with IR35) the more likely risk that salons face is by treating employees as self employed individuals; but you can check this by running them through the online HMRC CEST test (link below).

In conclusion

It’s an issue that the government has being trying to attack for years – and we’ve been following their attempts very carefully.

As the NHF states: “During the Queen’s Speech Boris Johnson gave an early indication that the government is concerned that the rising rates of self-employment across many sectors, including hair, barbering and beauty, could come at a cost for the government and taxpayers in lost revenues.”

And we know that Johnson recently said: “We will increase fairness and flexibility in the labour market by stopping employers and workers experiencing significantly different outcomes from flexible forms of working.”

We continue to watch this space very carefully!

Further reading

More info from HMRC can be found here:

HMRC’s CEST test can be found here:

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