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IR35: are you ready for the April changes?
The off-payroll working rules, also known as IR35, are a set of tax laws which can apply where businesses engage workers through an intermediary. The intermediary is usually a personal service company (PSC) but could also be a partnership or an individual (for the remainder of this note, we will use the term PSC to refer to any type of intermediary).
IR35 ensures that individuals who would have been employees if they were providing their services directly to an end client, rather than via a PSC, pay broadly the same income tax and national insurance contributions as employees.
Provided that contractors engaged via PSCs display the true characteristics of self-employed status, there is nothing wrong with this type of working arrangement. However, where a contractor appears to be an employee and they are using the PSC as a means of disguising their true employment status, the IR35 rules are likely to apply. PAYE deductions must then be made from the contractor’s earnings and paid to HMRC, together with Employers NICs.
What’s changing in April 2021?
Changes to IR35 in the private sector are due to come into effect for medium and large organisations (as defined in the Companies Act 2006) on 6 April 2021.
The new IR35 rules may affect:
- a contractor/worker who provides their services through a PSC;
- a business who receives services from a contractor through a PSC; or
- an agency providing contractors/workers’ services through a PSC.
With effect from 6 April 2021, the responsibility for determining contractors’ employment status will shift to end clients (i.e. the businesses who benefit from contractors’ services). Where an end client concludes that the IR35 rules apply, the fee payer (i.e. the organisation paying the PSC for a contractor’s services) becomes responsible for accounting for and paying the related tax and NICs, including Employers NICs, to HMRC.
What are your obligations?
Where you are the end-user of services performed by a contractor through a PSC, from 6 April 2021 you are required to assess whether the contractor is employed or self-employed for tax purposes (unless you fall within the small company exemption). You must take reasonable care in making that assessment and confirm the assessment, together with reasons, in a Status Determination Statement (SDS).
You must provide the SDS to the contractor before making the first payment to them. We expect that contractors accepting work are likely to want to know in advance whether they will be assessed as within the scope of IR35. As an end-user, you are also required to have a procedure in place to enable the contractor to challenge the assessment. Therefore, you should set out in sufficient detail the basis on which the decision is made, to show that reasonable care has been taken.
If you assess the contractor as falling within IR35, the fee payer is then responsible for operating PAYE and deducting employee NICs on the fees it pays to the contractor. The fee payer must also pay employer NICs and, where applicable, the apprenticeship levy. As set out above, the fee payer is the organisation paying the PSC for the contractor’s services. This could be you as the end client, or an agency, depending on the circumstances.
There is no precise legal test to determine whether a worker is in fact an employee and generally, no single factor which will determine employment status. However, HMRC has produced guidance on factors it considers to be most important in determining an individual’s employment status.
It has also produced an online tool which can assist end users in determining employment status for tax purposes, known as the CEST (Check Employment Status for Tax) Tool.
What should businesses be doing now?
The costs of getting it wrong can be severe, with penalties from HMRC as high as 100% of the income tax and NIC that has been avoided. You must take reasonable care when making a determination about the employment status of a worker as failure to do so will result in the worker’s tax and National Insurance contributions becoming your responsibility. A simple analysis of the contractual terms may not always be enough and a closer examination of the way that relationship operates in practice is likely to be required.
Given the potentially significant tax liabilities that the IR35 changes will create, it is important that businesses who engage contractors through PSCs (whether directly or via an agency) prepare for these reforms by identifying their current engagements and assessing each contractor’s true employment status. Going forwards, prior to engaging a contractor through a PSC, businesses should carry out a detailed assessment to determine their employment status, taking into account the factors outlined above and making use of the CEST Tool where appropriate.
HMRC have produced supporting guidance for the CEST Tool. This guidance confirms that HMRC will stand by the result produced by the CEST Tool, provided the information is accurate and it is used in accordance with their guidance. HMRC will not stand by results achieved through contrived arrangements that have been deliberately created or designed to achieve a particular outcome. This would be considered deliberate non-compliance and the business would risk financial penalties.
It is also recommended that businesses review their internal systems such as payroll software, process maps and HR and on-boarding policies to ensure that any changes required in light of IR35 are put in place.
Finally, specialist tax advice should be obtained, to understand the implications of IR35 on each business ahead of the changes coming into effect.
The IR35 area of our iTookit contains resources to assist HR3 members in dealing with IR35.
What other action should businesses take regarding employment status?
If a business receives a positive assessment for tax purposes, which confirms that IR35 is likely to apply, this may indicate that there is a wider issue for the business to address. At present there are separate frameworks determining employment status for the purposes of tax and employment rights (although there is significant overlap between the two). If the results of the CEST Tool or any specialist tax assessment state that someone is an employee for tax and social security purposes, the Employment Tribunal may or may not treat that person in the same way for employment rights purposes.
Businesses should therefore also undertake a review of their current worker, employment and self-employed agreements and consider how they engage with these individuals in practice, to determine their likely employment status for employment-law purposes. Incorrectly categorising a worker or employee as self-employed could result in back-pay claims for unpaid holiday pay and other benefits. Individuals who display the characteristics of employment status may also be able to bring claims for redundancy pay and/or unfair dismissal.
How can we help?
Our highly experienced Employment and HR Team is on hand to help businesses undertake a review of their current worker, employment and self-employed agreements for employment law purposes.
We are offering a fixed-fee employment status review which includes:
- An assessment of the contract and working arrangements for your self-employed contractors
- Written advice on the likely status of your contractors, for employment law purposes, with recommended actions to reduce risk
Cost: £750 + VAT
Our fixed-fee package is available to HR3 members and non-members.
The above fee applies where there is one type of contract or working arrangement to consider. Where there are multiple contracts or working arrangements, a bespoke quotation will be provided.