Off-Payroll Working and IR35: The New Rules
IR35, or the Intermediaries Legislation (to give it its full title) has never really been fit for purpose or provided HMRC with much success, when challenged, or – more to the point – actual revenue. It is therefore not surprising that new rules are about to be introduced which place the onus firmly on the contracting company. Executive Tax Manager Marina Trinchese and Tax Partner Mark Moore discuss these below.
What is IR35?
The IR35 rules were originally introduced in 2000, in an attempt to counter the perceived employment tax avoidance which arose where contractors provided their services through an intermediary (often their personal service company or PSC) where the contractor would otherwise have been treated as an employee had they contracted with the end client directly.
When the rules were first introduced, the responsibility lay with the PSC to determine the contractor’s deemed employment status and account for any income tax and National Insurance contributions . No risk lay with the client. Suffice to say HMRC have had little success in the last 20 years or so in challenging these arrangements.
What’s changed about IR35 so far?
In 2017 the rules changed and HMRC placed a greater burden on clients to determine the employment status of contractors. However, this change only applied In the public sector, where it became the client’s responsibility to decide the employment status of their contractor. In the private sector, the responsibility remained with the PSC.
Obviously, it was not going to remain this way, and the same changes were planned for the private sector with effect from 6 April 2020. These were delayed for a year due to Covid-19, so will now become law from 6 April 2021.
What’s changing from 6 April 2021?
From that date, all public sector agencies and all medium or large-sized private sector businesses will be responsible for deciding the contractor’s employment status. Small private sector clients will not be responsible for determining the contractor’s employment status, instead here the responsibility will fall to the PSC. If the off-payroll working rules apply, the contractor’s fees will be subject to tax and National Insurance contributions and must be processed through the payroll.
How do I know if the IR35 rules apply to my business?
The rules currently will not apply to any business which is classed as small. You will be classed as small if the business meets two out of the three following tests:
- annual turnover of £10.2m or less
- balance sheet value of £5.1m or less
- 50 employees or fewer
If you do not meet two of these three tests you will be classed as a medium or large business and the new off-payroll working rules will apply to you.
Determining employment status of workers
The business will be required to determine whether, if they had contracted directly with the contractor, the contractor would be regarded as an employee of the business. Further, they will need to produce a ‘status determination statement (SDS)’ in respect of each contractor and the associated contractual engagement. This should summarise whether the contractor should be treated as a deemed employee or a self-employed contractor and the reasons for this conclusion. The contractor will be able to appeal the SDS if they do not agree with the conclusion.
The new rules place a greater burden on the business to account for the working status of their contractors. Each medium or large business will therefore need an in-house process and policy to ensure an SDS is completed correctly for each contractor. If the business does not fulfil its SDS obligations for each contractor, it will be liable to account to HMRC for any employment taxes associated with the contractor’s services.
Reviewing the status of contractors
Public sector agencies should have been closely reviewing the status of their contractors since 2017, and whilst the new changes will result in an increased administrative burden in respect of the SDS preparation for each contractor, these entities should already have policies in place for determining the working status of their contractors.
However from 06 April 2021, all medium and large private sector businesses will now be required to undertake a review of the contractors they currently engage with and determine whether they have any deemed employees among their contractor workforce. They will also be required to introduce an internal policy and process for SDS preparation for each contractor, and to introduce an appeals system for contractors who wish to question determinations.
Are there any exceptions to the IR35 rules?
There is an exception to the new IR35 rules. If a contractor engages with the business through an agency or umbrella company which engages the contractor as its employee and their earnings are subject to tax and National Insurance, the business will not be required to meet the obligations under IR35. This is because such an agency or umbrella company is not treated as an intermediary under the rules.
One of the main challenges faced over the years since the introduction of the IR35 rules has been determining whether an individual should be treated as employed or self-employed. Guidance has been scarce, and many determinations have been made based on analysis of case law from which it is often difficult to draw consistent conclusions.
Using the CEST tool
HMRC introduced a ‘check employment status for tax’ (CEST) tool in 2017 to help employers and workers to determine how the work being done should be dealt with for tax assessments. The tool was updated in 2019, however the tool has been, and continues to be, severely criticised for taking an overly simplistic approach to a complex issue and erring heavily on the side of caution and in most cases concluding that there is deemed employment.
However, notwithstanding the feedback, HMRC will rely on CEST as their main tool for determining the employment status of a contractor, and therefore it is important that all relevant businesses take reasonable care in preparing the SDS where CEST has been used.
As a result of the complexity of the rules and the increased administrative burden which relevant businesses will be facing, it is expected that in the majority of cases a conservative approach to the question of deemed employment or self-employment will be taken. We are already seeing this in practice whereby most public sector and large business employers are insisting contractors are placed directly on their payroll for all assignments.
Speak to us about IR35
We have provided both a review and advice service in the IR35 field since the original rules were introduced over 20 years ago and would be happy to help whether you are a business or a contractor concerned these new rules may apply to you.
If you have any questions about the new off-payroll working rules please contact Marina at firstname.lastname@example.org or Mark at email@example.com or fill out the contact form below and we will be in touch.