Changes to IR35 from April 2021

IR35 was introduced by HMRC in 2000 to assess whether a contractor is genuine or a ‘disguised employee’.

The off-payroll working rules were designed to ensure that those who worked as employees, but through their own personal service company (PSC), pay the same Income Tax and National Insurance contributions as other employees.

HMRC estimates around 230,000 PSCs used by contractors may be affected by the change of rules. It believes that while two-thirds of these people are genuinely self-employed, around one-third may be disguised employees.

What changes have been made to IR35?

The changes, which were introduced to the public sector in April 2017, are to be extended to the private sector from April 2021.

The new rules will mean that responsibility for operating the off-payroll working rules from the individuals PSC will shift to the business or organisation they are supplying their services to. The business or organisation will also have the responsibility of deciding whether the employment taxes and National Insurance contributions should be deducted.

Do these changes affect you?

The government defines those who are likely to be affected by the new tax law as:

Individuals who supply their services through an intermediary, such as a PSC and who would be employed if engaged directly.
Medium and large-sized organisation outside the public sector that engage with individuals through PSCs. Public sector organisations have been affected by these changes from April 2017 onwards.
Recruitment agencies and other intermediaries supplying staff through PSCs.

Medium and large-sized private sector clients must apply the rules if they meet 2 or more of these conditions:

Annual turnover of more than £10.2 million
Balance sheet total of more than £5.1 million
More than 50 employees

They key question is whether the relationship between the individual and the business engaging the services is akin to an employment relationship. This will require careful consideration. If you are a private sector client and meet these conditions, you must apply these rules from April 6th, 2021.

There are also rules which cover connected and associated companies. If the parent of a group is medium or large, their subsidiaries will also have to apply the off-payroll working rules.

When considering whether you meet the qualifying criteria, a corporate entity must look at the last financial year for which the period for filing its accounts and reports ended before the beginning of the tax year in question.

For example, for the tax year beginning 6 April 2021 (2021-22), if a private entity’s financial year ends on 31 December. The 31 December 2020 accounts will be used to determine if the conditions are met.

How to determine whether a worker is caught by the off-payroll working rules

There are a variety of factors which determine if a worker should be classes as ‘employed’ and inside the off-payroll working rules, even if there is a contract between all parties, you would still need to look at the facts of the working relationship:

Supervision and control (does the employer have a say on how the worker completes their work?)
Substitution (could the worker bring someone else in to complete the contract, does the worker need to do the work themselves?)
Mutuality of obligation (is there an obligation for the employer to offer work and is the worker obliged to accept it?)
How the worker is paid (is the worker paid on a project basis or is it at certain monthly or weekly intervals?)
Exclusivity (does the worker only contract one client or multiple?)
Risky (is the worker responsible for any errors made during the contract period, is there a requirement to take out indemnity insurance?)

HMRC’s Check Employment Status for Tax (CEST) tool can be used to aid those making employment status decisions.

What happens if the worker is caught by the off-payroll working rules?

If an employer has workers who are caught by the off-payroll working rules they will be required to calculate and deduct National Insurance contributions and Income tax and pay these amounts over to HMRC.

The employer will also need to provide the worker with a valid Status Determination Statement. This should detail the following:

A statement determining whether or not the worker would be classed as an employee or office holder for tax and NIC purposes were they directly engaged by the employer.
Provide their reasons for coming to that conclusion, and
Confirm that they have taken reasonable care in coming to their conclusion.

HMRC have noted that the CEST tool can be used to aid the employment status decisions. If the answers provided to the CEST questions are accurate and in line with HMRC guidance, the revenue will stand by the outcome. As such, HMRC considers that an accurate CEST output can be used to constitute a valid SDS.

You’ll also need to make sure you keep detailed records of your employment status determinations, including the reasons for the determination and have processes in place to deal with any disagreements that arise from your determination.

FURTHER IR35 ADVICE

IAN LEIGH

Tax Partner

PARMINDER CHATTHA