IR35 and the Off Payroll Working Rules – 2021 changes

If you are a medium or large business in the private sector with a UK connection, and you engage contractors through their own limited companies, you need to be prepared for IR35 changes in April.

The changes were due to come into effect last year, but were delayed due to COVID-19. They will now be coming into force from 6 April 2021. If you haven’t already done so, you should take steps now to make sure your business is ready.

What is IR35?

IR35 refers to a piece of specific tax legislation. It was introduced to tackle perceived tax avoidance, to make sure that those who work for an end client through an intermediary and would otherwise be deemed to be employees ‘but for’ the intermediary, pay broadly the same taxes as employees. This is regardless of the structure they work through.

The intermediary is usually a personal service company (PSC). This is most commonly a limited company, but it can be an individual or a partnership.

For example, an IT engineer (Bob) may provide his services to a Tech Company (Tech Limited) but rather than Tech Limited engaging Bob directly, they contract with his personal service company Bob Limited.

Broadly speaking, under the current rules, if an employment contract would be deemed to exist between the individual and the end client for tax purposes, the intermediary company is responsible for deducting PAYE and National Insurance Contributions (NICs) from the income deemed to be employment income.

What is changing and how does this affect your business?

From 6 April 2021, the responsibility for determining whether IR35 applies will shift from the intermediary company, to the end client.

If you are the end client, you will have to use “reasonable care” to make a status determination. This is to assess whether the worker would be your employee if the intermediary was removed and they were working for you as an individual.

You must make the status determination by looking at all the contractual terms, as well as the actual arrangements in practice and apply the tests established by existing case law. HMRC’s online CEST tool can help you do this, although you are not obliged to use it.

If you determine that the engagement is within the scope of IR35, liability for deducting any PAYE/NICs will rest with you as the end client. This is if there is no other entity between you and the intermediary to whom you can pass the liability onto.

Does it apply to all businesses?

No, just those that meet two of the following three tests to be considered medium or large:

• Turnover – more than £10.2 million
• Balance sheet total – more than £5.1 million
• More than 50 employees

Importantly, if you are run a small business which does not meet these conditions, then you fall outside of the new rules. Your arrangements will continue to operate under the existing IR35 legislation.

The Status Determination Statement

As the end client, you must issue a ‘Status Determination Statement’ (SDS) which sets out your status determination and your reasons for reaching that determination.

This will need to be sent to the worker and to the entity below you in the labour supply chain, who you contract with. A failure to pass a valid SDS down the chain (if applicable), will result in you remaining liable for tax and NICs until you have met that obligation.

Failure to take “reasonable care” in reaching the determination, will render the SDS invalid. HMRC set out examples of what they mean by reasonable care in their guidance. Making a blanket determination on all arrangements, and not looking at each case individually, is unlikely to show that you have acted with reasonable care.

The law also requires you to have a status disagreement process in place to deal with any disputes over the SDS.

Action points

We recommend that now is the time, if you have not already done so, to:

• Carry out an audit of your existing workers and supply chains. Some questions to consider are:
  • Are there PSCs or other intermediaries involved?
  • Do you contract with an agency who then contracts with workers?
  • Are any of those workers providing their services via a PSC?

• If you have identified an engagement which falls within the scope of the new rules, do you consider the worker could be an employee for tax purposes? If the engagement is to continue after 6 April 2021, you will need to prepare a status determination statement and issue this, even if you determine that there is no deemed employment.
• Consider if you need to change working arrangements to reflect the actual relationship. For example, this could involve moving to an employed model.
• Make sure you have internal processes in place for determining worker status, recording your decisions and reasons, preparing the status determination status and issuing these. You should make sure you have a status dispute process in place, as well as checks to ensure you regularly review the status of your contractors.

IR35 – further support

For further guidance on the issues covered in this article, book a free 30-minute consultation with our Employment team today.

You can also now access our latest Brachers Bitesize webinar, which covers the key points of the new IR35 rules coming into effect.

This content is correct at time of publication