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Shadia El Dardiry
Solicitor
Postponed to help businesses deal with the Covid-19 pandemic, the long-anticipated changes to IR35 are expected to come into force on 6 April 2021. Despite the challenges created by the pandemic, HMRC will expect medium and large-sized private sector organisations to be ready.
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What’s happening
From 6 April 2021 businesses engaging contractors via specific intermediaries, such as a personal service company (PSC), will be required to carry out an assessment of the contractor’s tax status. This will also be the case if there are other parties in the chain, such as agencies.
If, following this assessment, the contractor is considered to be in ‘deemed employment’, which means that they would have been considered an employee for tax purposes if they had been providing their services directly to the organisation (rather than through an intermediary), then income tax and NICs will need to be deducted from the fees paid to them for their services. Employer NICs will also be payable.
This reflects a significant change to the IR35 rules (also known as the off payroll-rules), which were first introduced as a tax avoidance measure in 1999 and aim to ensure that contractors providing services through intermediaries and who essentially did the same work as ‘employees’ were taxed as such, instead of being able to draw their earnings in tax efficient ways (such as via dividends and by offsetting expenses against taxable profits).
For the first 16 years, the rules provided that the responsibility for assessing tax status and, where appropriate, deducting income tax and NICs, lay with the PSC.
Since 2017 this has no longer been the case in the public sector, with the responsibility for assessing tax and making appropriate deductions shifting to the public sector client.
This will now also be the case for medium and large-sized organisations in the private and third sector, who until now have had no obligations under IR35.
While there is a possibility of a further delay to the rules coming into force given the ongoing impact of the Covid-19 pandemic on businesses, attempts to postpone the introduction of the rules have so far failed.
This is not surprising, given the tax revenue expected to be generated from the changes and Rishi Sunak’s comments when he introduced the Self-Employment Income Support Scheme in 2020 that it was now “much harder to justify the inconsistent contributions of different employment statuses” and “if we all want to benefit equally from state support, we must all pay in equally in the future.”
Will my organisation be affected?
If your organisation engages with contractors and off-payroll workers, you could be impacted by the IR35 changes as it is likely that you will be engaging some individuals via PSCs or other intermediaries.
However if your organisation is classed as a small business, IR35 does not apply and PSCs will continue to be responsible for compliance with the regime. A small business is defined in the Companies Act 2006 as an organisation which meets two of the following three criteria for two consecutive years:
For charities it is important to note that the definition of ‘turnover’ is intended to have the same meaning as defined in Section 474 of the Companies Act (turnover is the amount derived from the provision of goods or services within the company’s ordinary activities after deduction of trade discounts, VAT and other relevant taxes). Therefore, charities which receive donations and other voluntary income which does not derive from the provision of goods and services, should not count this towards their turnover.
If you are a medium or large-sized company, your obligations will include:
How do we know whether there would have been an employment relationship and if the contractor is in ‘deemed employment’?
Unfortunately, you can’t just rely on what the contract says. To get to the crux of this question, organisations will need to consider the reality of all aspects of an individual contractor’s working arrangements.
Relevant issues that should be considered include:
To assist with determining an individual’s tax status, HMRC has developed an online tool to help clients check the employment tax status of their contractors (Check Employment Status for Tax (CEST)). However, the tool has been criticised for being biased towards making a finding that the off-payroll rules apply (even where a court would disagree). In complex cases, the tool may also conclude that the individual’s status is “undetermined”.
Seeking legal advice and carrying out further analysis will therefore be prudent, particularly in borderline cases or where the parties want to explore what legitimate changes can be made to the relationship such that it does not fall within IR35.
What happens if we conclude that there is an employment relationship for tax purposes?
In the first instance, you will be required to communicate your conclusion to the contractor via a “Status Determination Statement”, along with your reasons. This will also be the case if you find that the individual is not an employee for tax purposes.
The contractor, or any intermediary in the chain responsible for collecting and paying the fees (such as an agency), must be given the opportunity to challenge the status determination.
If the determination is challenged, you must respond within 45 days, either confirming the original determination or replacing it with a new one and giving reasons. Failure to respond within this time frame may increase the tax liability faced by the client.
It may be that both parties are strongly committed to an arrangement that falls outside of IR35. In those cases, it will be appropriate to explore whether the arrangement can be changed such that the contractor’s work is no longer considered ‘Deemed Employment’. This may not always be feasible or realistic.
It is worth noting that an individual may be an employee for tax purposes, but not for employment law purposes. The test under employment law and tax law are not uniform.
How should my organisation prepare for the changes?
Dealing with the roll out of IR35 to the private sector is no small task and there are several preparatory steps you can take now to ensure that your organisation is ready for 6 April 2021:
Do you have any top tips?
The IR35 rules are not straightforward and businesses will be facing a steep learning curve come April. However, here are our top tips on how to stay compliant with the IR35 rules:
How can Bates Wells help?
Here at Bates Wells we have a strong team of experienced IR35 experts who are already helping organisations understand and prepare for the changes ahead of April 2020. We are happy to assist with all stages of the compliance process including:
We also offer an in-depth webinar (‘An essential Guide to IR35: What does your organisation need to know?”) and supporting materials such as an employment status checklist and a template SDS. To learn more about having the webinar delivered for your team, please email [email protected]
If you have any questions, or require any assistance, please don’t hesitate to contact Paul Jennings ([email protected]) or Shadia El Dardiry ([email protected]).
Our previous webinars on IR35 include:
To access an audio recording of these webinars, please email [email protected] (note: the content in these webinars is correct as of February 2020).
This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.
All content on this page is correct as of January 25, 2021.