The IR35 tax rules have been confusing everyone for a few years now and with the new OPW “off-payroll working” changes now being delayed (thanks to COVID-19) until April 2021, we look to clarify how either apply to Salons where they have self employed businesses working in them (whether through chair renting, space renting, contracting or income splitting).
Before you read on, this is important!
Neither IR35 nor OPW are likely to apply to your salon, because neither rules apply to:
- Self employed contractors
- Self employed contractors supplied by a temp agency (who would pay them via their own PAYE)
- Contractors who have a contract of employment with an umbrella company (who would pay them via their own PAYE)
However, HMRC can still attack self employed set ups in different ways, other than IR35 & OPW. Read on…
Whats HMRC’s beef?
HMRC are looking for disguised employment. In other words, the person in your salon is (for all intents and purposes) really your employee – whether you’re treating them as that or not.
The IR35 tax rules (previously known as the “employment intermediaries” rules) apply when a “worker” in your salon supplies their services via a “controlled” 3rd party (which includes a ‘personal service company’ PSC, partnership, or even another individual).
Currently looks for an IR35 situation within the public sector; but from April 2021 now includes it within the private sector.
How might this apply to salon owners?
By using a PSC, a self employed 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 that person.
As an 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 an income splitting arrangement with a stylist, but the contract is between your salon and a Ltd company (one that they have set up) and you treat them as self employed.
The Ltd company that they have set up could be deemed a personal service companies “PSC” by HMRC.
How does HMRC use IR35 & OPW?
HMRC applies IR35 & OPW 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 its own employment status test and if the person fails, 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 2021
From April 2021, 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 (like most salons), 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 salon owners be worried then?
For the vast majority of Salon owners, IR35 & OPW should not be a worry, for at least 1 of 2 reasons:
- 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;
- 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 different to IR35 or OPW) the more likely risk salon owners face is with their chair renters.
Where HMRC find that your self employed individuals should actually be treated as employees, they will go after the salon owner for PAYE & NIC, backdated to when the individual started working in your salon.
You can check each of your self employed individuals by running them through the online HMRC CEST test (link below).
Print off the results and HMRC say they will abide by them.
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.”
It’s an issue that the government has being trying to attack for years – and we’ve been following their attempts very carefully.
We continue to watch this space!
More info from HMRC can be found here:
HMRC’s CEST test can be found here: