First introduced in 2000, IR35 (also known as intermediaries’ legislation) is designed to reduce tax avoidance by contractors or consultants who HMRC believe to be “disguised employees” i.e., people who work in a similar way to employees but bill for their services via their limited companies to make their business as tax efficient as possible.
Under the IR35 rules, those people providing services via a company (and working in a similar way to employees) should still pay similar taxes to other employees. The rules currently require the contractor to make a self-declaration regarding their employment status for tax purposes. HMRC considers that there is considerable noncompliance with the IR35 rules at present.
From 6 April 2021 the two key changes are:
The ‘end client’ must formally make an employment status determination; and
If the engagement falls inside IR35, the organisation in the supply chain that pays the intermediary will be required to include the worker on their payroll, and account for income tax and national insurance contributions (NICs), including employer NICs.
The changes for the private sector mean the end-client will be responsible for determining the IR35 status of an assignment with a Personal Service Company (PSC). The rules will be consistent with the changes brought in for the public sector in April 2017.
Small business exemption to new IR35 rules
It is important to be aware the new IR35 rules only apply to ‘medium or large’ sized businesses in the private sector, in addition to all organisations in the public sector.
There’s an exemption for end-clients who are ‘small businesses’ as defined by the Companies Act 2006, so long as they meet two or more of the following criteria:
Annual turnover is no more than £10.2 million.
Balance sheet total is no more than £5.1 million.
No more than 50 employees.
Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of an assignment remains with the PSC, or contractor, and the new rules do not apply.
Determining employment status
HMRC’s Check Employment Status for Tax (CEST) online tool is designed to help employers and workers determine how work being done should be dealt with for tax purposes. Providing the end-user and not the contractor correctly enters the information and keeps it up to date, HMRC are bound by the result.
A Status Determination Statement (SDS) must be completed by the client for each contractor they use. For it to be valid, it must:
State whether the contractor is an employee or not, for tax and NIC purposes if directly engaged by the client
Provide the reasons for reaching that conclusion
Have taken reasonable care in reaching their conclusions
Who is liable if the IR35 tax and NICs are not paid?
HMRC will have the ability to recover unpaid income tax and NICs as well as issue fines /penalties for noncompliance.
The entity towards the bottom of the contract chain, which pays the PSC (the fee-payer), will be liable in most situations.
Failure to take reasonable care or failing to provide a Status Determination Statement (SDS) will result in clients being deemed the fee-payer (where they are not already) and therefore the entity responsible for PAYE/NIC.
How to prepare
Look at your current workforce:
This includes those engaged through employment agencies.
Identify individuals who are supplying their services through their own limited company (sometimes known as a personal service company, PSC) or another intermediary.
Put in place processes to identify future individuals who work in this way.
Talk to individuals and agencies you engage with:
You may need information from them on some engagements.
Determine if the off-payroll working arrangements apply:
Check if the rules apply for any contracts that will extend beyond or start after 6 April 2021.
Decide who in your organisation is the appropriate person to make an employment determination.
Use HMRC’s Check Employment Status for Tax (CEST) service to make determinations. (Insert hyperlink)
After you have determined if the rules apply:
You will need to tell the contractor (and any agency you engage with) the outcome.
Use a Status Determination Statement (SDS) to inform them. . This must be provided to the PSC worker and, if any agency has the responsibility of paying the contractors, they should also receive a copy. This must be provided before any assignment begins.
Who will operate PAYE:
Consider if you or an agency will have to operate PAYE.
If you need to operate PAYE, put in place processes to make sure the correct Income Tax and National Insurance contributions (NICs) are deducted for engagements inside the rules from 6 April 2021.
Dealing with disagreements:
You will need to set up a process to deal with any disagreements about the employment status determination. This is a legal requirement.
You will need to make sure you keep detailed records of your employment status determinations, including the reasons for the determination and the fees paid.
Test your processes:
You will need to test your processes, systems, and controls to make sure you’re ready.