From 6 April 2021, the ‘off-payroll’ IR35 regime that now applies to the public sector will be extended to all medium and large private sector entities. These changes were originally due to come into force earlier this year but were delayed because of the Covid-19 public health emergency.
Now, with just six months to go, businesses must apply their minds to the implications of these changes on their arrangements with contractors (or freelancers/consultants), and make sure they fulfil their obligations under the legislation. HMRC is expected to carry out a considerable amount of compliance work in the coming months as a result of the various furlough scheme initiatives, and IR35 remains very much on the government agenda. Indeed, it is estimated the measures will generate £3.1 billion of much needed additional tax revenue in their first four years.
What is IR35?
The off-payroll working rules will apply where an individual (usually referred to as a ‘contractor’) provides their services through their own limited company (or another type of intermediary) to the client, but would be classed as an employee if they were contracted directly. Although an intermediary will usually be the contractor’s own personal service company, it could also be a partnership, a different personal service company, an agency or another individual.
The ‘client’, ‘end-user’ or ‘engager’ is the organisation that receives the services of a contractor. The change in the rules will make the engager responsible for determining whether the off-payroll working rules apply. If so, these individuals will be ‘deemed’ or ‘disguised’ employees. If the engager gets it wrong, it could be liable for any tax due just as an employer would.
In essence, this is an anti-tax avoidance measure designed to ensure that those who are in ‘disguised employment’ have income tax and national insurance contributions deducted at source by the engager. However, an area of contention is likely to be the extent to which those individuals given a determination that the IR35 rules apply to them will demand full employment rights such as paid holiday, pensions, paid sick leave and so on. This could prove to be very expensive if the individual successfully claims for backdated holiday entitlement, for instance, as there is no limitation on the period for which the worker can claim.
What are the changes?
The engager will have to assess whether the IR35 rules apply to any consultants, contractors, and freelancers who are being paid via an invoice from their limited company (or other intermediary). Sole traders are not caught by the IR35 changes as they do not operate via an intermediary.
Where the engager concludes that IR35 applies, it will become responsible for accounting for and paying the related tax and national insurance contributions, including the additional cost of employer’s national insurance contributions, to HMRC. This will apply to any payment made on or after the rules come into force on 6 April 2021. HMRC has also indicated that it will not generally investigate the application of IR35 rules by personal service companies retrospectively unless there is evidence of fraud or criminal behaviour.
Although “small” private sector engagers are exempt from these changes, they will still have to measure the size of their company each tax year to make sure they fall outside of the scope of the rules. A company will be “small” if it has not more than 50 actual employees, a turnover of not more than £10.2m and a balance sheet of not more than £5.1m. It must meet two out of three criteria (for two consecutive accounting years) in order to satisfy the definition of a “small” company.
It is worth noting that a company may not be “small” for IR35 purposes if it is in fact part of a larger group of companies. If the company itself is “small” but it sits within a group structure, the small business test will need to be applied to the group as a whole, taking into account the aggregate turnover and balance sheet total. The government will not permit a situation where a company group could simply bypass IR35 by engaging all its contractors through a “small” subsidiary.
The starting point, therefore, should be to carefully consider whether the “small” business exemption applies to your company. Even if it does, this should be kept under annual review in the event that the business grows and no longer meets the specified criteria.
If the small business exemption does not apply, and your business engages contractors via an intermediary, then here are just some of the steps you should be taking:
1. Identify any contractors who provide their services via an intermediary
2. Get all the relevant contractual documentation together
3. Obtain sufficient information about how the individual works in practice - ask questions such as: does the contractor have other clients, public liability insurance, their own premises/website? Do they bear financial risk?
4. Obtain a Status Determination Statement (SDS) - this can be done via CEST, an online employment status test tool provided by HMRC. The SDS can be issued by you before 6 April 2021.
5. Tell the individual the outcome of the status determination, with full reasons
6. Have an appeals process - if you fail to provide an appeal outcome within 45 days the business will become responsible for the contractor’s tax and national insurance contributions, as well as employers’ national insurance contributions. This could be very expensive if the contractor is highly paid.
It is important to ensure that somebody within your business has ownership of any contracts with contractors and keeps these relationships under regular review. It is not unusual for someone that is operating safely outside IR35 to drift towards employment status over time.
We are ready to advise and support you with actively managing the off-payroll issues within your business, and preparing for these potentially complex changes. Please contact a member of our employment team for more information.
