By Hannah Clifford and Padma Tadi
The last 12 months have been incredibly challenging for many organisations as they looked to deal with the impact of the COVID-19 pandemic. Many of these difficulties remain and with changes to IR35 now on the horizon, many businesses need to prepare.
IR35 is a reference to tax legislation used to refer to rules relating to “off-work” payroll. This means where individuals provide their services to an organisation through an intermediary company (such as a personal services company (“PSC”)).
From Tuesday 6 April 2021, organisations in the private sector, who meet certain criteria (see below) that engage “off-payroll” workers will become responsible for determining but for the intermediary company in the middle of the relationship, would the individual would be regarded as an employee or worker for national insurance and tax purposes? If yes, the organisation will become responsible for paying Income Tax and National Insurance Contributions (NIC) for those individuals.
Why does it sound familiar?
The changes that are coming in this April were due to come into force last year but because of COVID-19, it was pushed back a year.
What’s actually changing?
IR35 has been around since 2000. The rules were introduced to make sure that individuals who work like employees pay broadly the same employment taxes as employees, regardless of the structure they work through.
HMRC have found it difficult and time consuming to enforce the rules because currently, PSC has to decide if the relationship between the individual it supplies to a client would, in reality, be one of employment if the contract was directly between the PSC and the end client. The PSC is then also responsible for accounting any tax due to HMRC.
This is done by looking at factors such as who controls the work being carried out, whether the PSC can send a substitute to do the work (with or without the agreement of the client), who supplies the equipment used and the extent to which the client is obliged to offer work and the contractor to accept it.
As such, HMRC has decided to shift the burden onto those organisations at the top of the chain, engaging the PSCs and benefiting from the service. In 2017, the Government addressed this issue in the public sector, who already have to comply with these new rules. Therefore, from April, the onus of deciding if an individual falls under IR35 has to be decided by the end user organisation engaging them. If it decides they’re within IR35 the end user organisation must pay Income Tax and NICs. This will result in organisations now paying higher fees or (most likely) negotiating lower fees with the contractor.
How much tax is at stake?
HMRC believe that 90% of PSCs who should apply IR35 don’t do so – at a cost of £700 million or more.
Do the new rules apply to me and my organisation?
The government has said that the rules won’t apply to small organisations but organisations who meet at least two of the following criteria:
- Annual turnover of more than £10.2 million
- Balance sheet total of more than £5.1 million
- More than 50 (F/T equivalent) employees.
If your organisation is small but is within a corporate group, the parent company of that group must also be classed as ‘small’ in order to avoid the new rules.
What are my obligations if the new rules apply?
The end user client will be responsible for determining if the work is caught by IR35 and will be responsible for notifying the PSC making the payment to the worker. They also have to tell the worker and explain the reasons why they believe IR35 applies.
The end user client must have some form of appeals procedure allowing the worker and/or agency to challenge their decision.
The person (or closest person based in the UK) who pays the PSC will be responsible for withholding any PAYE/NIC on the payments and accounting for these to HMRC under the usual PAYE real time information arrangements.
The responsibilities may vary if the contracting chain is more complex (for example, if there is also an agency involved).
The end user client may also need to consider if their existing contracts are fit for purpose and allow for deductions to be made for tax and national insurance.
Are there fines for non-compliance?
The Government makes it clear that employers must assess a contractor’s employment status for tax purposes and pay any tax due. Those that don't may have to pay financial penalties which in serious cases can be up to 100% of the tax due.
HMRC have said it’ll operate a 'grace period' until April 2022 and won't impose penalties for businesses who make genuine mistakes: 'You will not have to pay penalties for inaccuracies relating to the off-payroll working rules in the first 12 months of the operation of the new rules, unless there’s evidence of deliberate non-compliance.'
How can I prepare?
This will depend on whether you’re the end-user client of the services, an intermediary in the payment chain or the person making the payment to the worker.
You’ll need to start preparing because introducing appropriate policies and procedures will be extremely time-consuming.
The legislation applies to payments made after 6 April 2021, and will also apply to any invoices that are paid after the date even if the work was done much earlier. You therefore need to be up and running by 6 April 2021.
You’ll need to consider a number of issues including if you fall within the definition of ‘small’ and who’ll be responsible for determining the correct status of your service providers.
How can we help?
Our team are experienced in dealing with IR35 matters and can help you with any stage of the process. We understand that each business is different and has a unique relationship with its workers, so our advice is tailored to your situation.
Provide a traffic light report on your working practices, explaining whether your current processes fall under IR35
- Provide template contracts and status determination statements
- Support you with current contracts and advise on negotiating changes
- Provide training to your team to help them better understand IR35
- Manage regulatory investigations or enforcement.
For more information on how we can help, visit the IR35 section of our website.