Following a delay of a year in light of the COVID -19 pandemic, 6th April 2021 saw the new “off-payroll working,” or better known IR35 rules for private sector organisations come into force. Here’s our guide to what you and your business need to know:
What is IR35?
In short, IR35 is an anti-avoidance scheme for tax.
It’s used to refer to rules relating to “off-work” payroll. This means where individuals (for example, contractors or consultants) provide their services to an organisation or “end user” through an intermediary (such as a personal service company).
The rules introduced by HMRC are designed to assess whether that contractor is a genuine contractor rather than a “disguised” employee for the purposes of paying tax.
When a contractor is a “disguised” employee, they might be taking advantage of the tax savings of working through a limited company, when they may otherwise be an employee if not working through their company.
The benefit for employers is that they don’t have to pay employers’ National Insurance contributions or give contractors the usual employee benefits (for example, holiday and sick pay). The benefit for contractors is that they can pay themselves tax efficiently.
So IR35 is essentially an employment status test for tax, which works out whether a contract points towards employment or self-employment.
Who decides whether IR35 applies or not?
Before April 2021, the responsibility of determining if the contractors that are working for them are self-employed or employees (for tax purposes) was the intermediary’s, rather than the end user organisation.
Since 6th April 2021, the burden has shifted. Now the onus of deciding the contractor’s employment status and if it falls under IR35, has to be decided by the end user organisation engaging them.
Ultimately, this means the liability for getting it wrong and incorrectly determining that an individual is not caught by IR35 – will fall on the end-user client, who may be pursued by HMRC for failing to comply with its income tax and National Insurance contributions obligations.
Will the IR35 rules apply to my business?
The new changes affect all “medium and large” sized businesses in the private sector (the rules already apply in respect of public sector organisations).
“Small” end user clients in the private sector will not be caught by the latest changes, meaning the intermediary will continue to bear the responsibility of determining IR35 status.
An end user client is a “small” business if it meets two or more of the following conditions:
- Its annual turnover is not more than £10.2m;
- Its balance sheet total is not more than £5.1m; and / or
- It has not more than 50 employees.
If your company is part of a group company – then the group’s size is determined by the size of the parent company. This means that if the parent company is classed as medium or large business, every member of the group, including yours, will be too.
The IR35 changes apply to my business – what do I need to do now?
If the changes apply, you should audit your workforce. For each “off-payroll” worker or individual providing services to your business through an intermediary, you need to determine their status.
In doing this, the key question to ask is – “If the Services were provided directly between you and the individual worker, would the worker be regarded as your employee?”
In answering this question, the contract you have in place is the starting point.
However, you need to look beyond the contract and at the reality of the working relationship when determining the individual’s employment status. Key factors to consider include looking at:
- Mutuality of obligation – if the individual is required to accept work offered by your business and/or your business is required to offer work to the individual, this points towards deemed employment.
- Control – if your business decides matters such as what the individual does and when, or where and how they do it, this points towards deemed employment.
- The right to provide a substitute – if the individual is required to perform the work personally and can’t send a substitute, this points towards deemed employment.
Once you have made your assessment, you must notify the individual of your status determination statement (SDS) and the reasons for that determination.
If IR35 applies, you will need to ensure that the required deductions for tax and national insurance (including employers) are made and accounted for to HMRC.
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.
HMRC have said it will operate “a grace period” until April 2022 and will not impose businesses who make genuine mistakes, rather than deliberate non-compliance.
Want to find out more?
We can help your business by putting in place the right contracts when engaging individuals through intermediaries (including a review of existing ones) and advise you on how to determine their employment status, to help minimise the risk of IR35.
Mike Patterson is an industry ranked Employment lawyer and head of Berwins' employment team