Joshua Leigh & Co

IR35: Everything you need to know about the off-payroll working rules

The off-payroll working rules, known as IR35, will see fundamental changes to the determination process for the private sector in April 2021. However, many people remain unaware of their legal obligations.

We will look at the upcoming changes, focusing on how they will affect contractors and businesses, as well as what the obligations will be for employers.

What is changing?

From 6 April 2021, new off-payroll working rules will come into effect in the private sector. These changes were due to roll out in April 2020 but were delayed to allow businesses to deal with the economic impact of the Coronavirus pandemic. Similar rules have already been implemented within the public sector since 2017. 

As well as employers, the legislation is primarily aimed at contractors who work through a personal service company (PSC), but it could affect charities and third sector organisations as well.

Under the new rules, all medium and large-sized private sector end clients will be responsible for deciding a contractor’s employment status, as opposed to current rules, where workers decide their own employment status.

The IR35 rules were first introduced in 1999 to tackle ‘disguised employment’. The legislation was intended to prevent this practice where workers use a PSC, even though they are working as if they were employed.

This upcoming change is an update by HMRC to tackle the issue, as they believe there continues to be non-compliance with the original IR35 rules.

As the new rules place the burden of responsibility for determining employment status on the engager or fee payer of a contractors’ services, businesses should be prepared to implement the necessary controls well before the legislation comes into effect in April.

What do businesses need to know?

It is the responsibility of the end client to determine employment (IR35) status for tax purposes in the form of a Status Determination Statement, or SDS, and communicate this decision to the appropriate fee payers and contractors in the supply chain. 

Under this change, the responsibility for operating PAYE and NICs will move from the PSC to the “fee payer”, which is the entity that contracts directly with the PSC. 

From April, these large employers are required to undertake an SDS for every contract they agree with a worker. The official guidelines are as follows:

• Pass your determination and the reasons for the determination to the worker and the person or organisation you contract with
• Make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
• Have processes in place to deal with any disagreements that arise from your determination.

If the determination results in a contractor being within the IR35 rules, the fee payer will need to deduct and pay tax and National Insurance contributions to HM Revenue & Customs via PAYE. 

Where a fee payer fails to correctly identify a disguised employment scheme, the worker’s tax and National Insurance Contributions become their responsibility.

Where you hire a contractor via an agency it is the responsibility of the closest intermediary to the PSC to calculate, deduct and pay tax via PAYE on the contractor’s remuneration.

For help determining employment status, businesses can use the Check Employment Status for Tax (CEST) tool, found here. 

This tool has undergone a number of changes since its launch, but businesses should be aware that under certain circumstances it may not provide the correct determination, which is why seeking expert advice is crucial. However, HMRC is bound by the result if entered correctly and kept up to date.

Soft landing period

The Chancellor, Rishi Sunak, has also offered reassurance to contractors that HMRC will ensure a soft landing is in place for the first twelve months following the implementation of the IR35 rules. This means that HMRC will not impose strict penalties on businesses that breach the rules during the first year, allowing for firms to adjust to the new requirements.

Exemptions

The new off-payroll working rules only apply to medium and large employers. According to the Companies Act 2006, a business is defined as ‘medium’ or ‘large’ if it meets two of the following criteria:

• The company has a turnover of £10.2 million or more
• The company has a balance sheet total of £5.1 million or more
• The company has 50 employees or more.

The end user may also be exempt where they are based overseas. 

What should contractors do to prepare for this change?

Being paid via PAYE means that the tax-efficient methods of payment via PSC may no longer be possible. 

Many contractors will, therefore, see a reduction in the amount that they can earn if they are deemed to be within the off-payroll rules, as they could subject to a higher rate of tax and NICs.

In some cases, contractors and freelancers operating via an intermediary are being asked to join an umbrella company. Before doing so they should seek advice to ensure that this arrangement is suitable for them.

It is important that contractors also seek professional advice on this change to understand how it might affect their personal finances and the status of their company. 

In cases where they feel that a Status Determination Statement is incorrect, or the end-user uses a blanket determination on all contractors, which brings them inside of IR35, it is possible to appeal these decisions.

For help and advice with the new off-payroll working rules, contact our experienced team today.