IR35 - New changes from April 2021
New IR35 changes will be implemented in April 2021 for private sector contractors that will transfer responsibility from contractors to large and medium companies to assess off-payroll worker status.
But what exactly are the IR35 rules, and what can you do to prepare for these changes?
What is IR35?
Some independent contractors who work through an intermediary, such as a personal service company, may benefit from a certain level of tax efficiency. They may not be entitled to employee benefits such as holiday pay or sick pay, but their tax status often enables them to take home more net pay than an employee in the same role.
The benefit to a company of hiring an individual in this way, is that they don’t have to operate PAYE or National Insurance Contributions.
IR35 legislation ensures that UK contractors pay the same tax and National Insurance contributions as an equivalent employee would.
How does it work?
IR35 effectively determines whether an individual is a bona fide contractor or a ‘disguised employee’ for the purposes of paying tax. If it is concluded that an individual is a ‘disguised employee’, they will be deemed to be inside IR35 and will be subject to PAYE and NIC. If it is concluded that an individual is actually a contractor, then they will be deemed to be outside IR35 and will not be caught by the rules.
The key question that needs to be answered is whether the worker would have been an employee of the client if they had been working directly for it.
The most important factors to consider include (but are not limited to) whether there is
- personal service,
- mutuality of obligation,
- employee-type benefits and
- whether the individual provides his or her own equipment.
What are the IR35 changes?
Currently, in the private sector, contractors working through a personal service company are responsible for making their own assessment as to whether they fall inside or outside of IR35. If they make the assessment incorrectly, it is the contractor and not the client or agency who is liable for any unpaid tax and NICs.
In April 2021, changes to IR35 will be implemented for private sector contractors, transferring responsibility from contractors to large and medium companies to determine if IR35 will apply.
There is a limited exclusion for small companies, defined by HMRC as not exceeding two or more of the following criteria;
- an annual turnover above £10.2 million,
- a balance sheet total over £5.1 million, or
- more than 50 employees.
Liability for PAYE and NICs will potentially pass to the hiring company or fee payer if it is deemed to have failed to take ‘reasonable care’ in making the decision.
What will the changes mean for contractors?
If they are assessed as inside IR35, contractors will need to pay the same income tax and NICs as if they were employed, but they still won’t receive employment benefits, such as paid holiday or sick leave, from the hiring company or fee payer. Being assessed as inside IR35 can also have financial implications for the contractor, including a reduction in their net income.
What can you do to prepare?
Large and medium-sized organisations should
- undertake a review of their use of contractors, setting out who they are currently contracting with and on what basis.
- make use of an HMRC online tool called CEST. However, this should be approached with caution and should not be used as a substitute for a full and proper investigation.
- evaluate any contracts that they have in place with individual contractors.
- Issue a Status Determination Statement to contractors of how the decision on their IR35 status is reached.
If agreement cannot be reached on status, a process of appeal must be made available to the contractor.
Whilst it is important that contracts are drafted in such a way as to reduce the risk of IR35 applying, it is also important that the practical reality is in accordance with those terms. A carefully drafted contract will not avoid being caught by IR35, unless it also reflects the reality of the situation.
IR35 is a complex area of law so speaking to a tax specialist early on and before starting your review is recommended.
The tax cases brought for judgement recently have highlighted the fact-sensitive nature of the legislation. Currently no easily applicable checklist exists making it difficult for businesses to apply blanket procedures to ensure adherence to IR35 with multiple contractors. At this time employee status will be best analysed on a case by case basis.
The changes to IR35 will likely result in administrative challenges for large and medium-sized organisations.
If you are a business and you think that the IR35 changes may impact upon your operations, then please get in touch and we will be happy to discuss this further.