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What is IR35?

IR35 is used to describe two sets of tax legislation that are designed to combat tax avoidance by workers, and the firms hiring them, who are supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used.

IR35 legislation has been in existence since 2000, to assess whether freelancers working through an intermediary (LTD company/PSC) are ‘disguised employees’ and should be being paying tax and NI at normal PAYE rates.

The IR35 legislation applies to contract workers who operate as a limited company, working for a third party to provide specialist services to the client that they are working for at any one time. HMRC will look at each individuals contract and their workspace, to determine whether or not they are inside or outside IR35. If HMRC finds that a contractor is being treated as a full-time employee, or is receiving the same benefits as a full-time employee, they will be deemed as inside IR35. These contractors are deemed as ‘disguised employees’ and are suspected to be tax avoiders.

‘What’s changing?

The tests for IR35 aren’t changing but the responsibility of who administers and determines the status of an assignment is.

From 6th April the end client will now be responsible for undertaking the IR35 status determination/assessment of each and every time they engage with a freelancer. The deemed employer is the last person above the contractor, that has received the status determination and is responsible for paying PAYE.

Currently liability for determining the status of a position lies with the freelancer, who is liable for any outstanding tax and NI if an assessment is incorrect. From the 6th April whoever pays the freelancer is liable. This could be the end client if you are engaging a contractor directly or a recruitment business if they are paying the freelancer for you.

Are there any exemptions?

From April 2021 the rules will apply to private sector companies (they’ve been applicable to the public sector since 2017) that meet two or more of the following conditions:

• Annual turnover of more than £10.2mn
• A balance sheet of more than £5.1mn
• More than 50 employees

Good news for small companies, as you’re exempt from the changes at this point in time and the responsibility for the status determination of an assignment stays with the PSC.

How do you determine the status of the assignment?

The end client needs to take reasonable care to determine the status of an assignment, otherwise they risk the liability for unpaid tax/NI transferring back to them. The status determination needs to be shared with the contractor and the fee payer for the assignment (this may be the recruitment business). If there is a chain between the end client and the PSC then the status needs to be passed down the chain to the final fee payer.

The government has created a tool ‘CEST’ on the gov.uk website which can help you to determine the status of an assignment. It’s not mandatory to use but HMRC say that if information is correctly inputted and with reasonable care then they’ll stand by the decision.

HMRC uses the following factors to test your IR35 eligibility.

1. Substitution

If your employer has the option to send a substitution to complete works in your place, it suggests that you aren't providing a personal service, and the worker isn't an employee.

2. Control

If your employer controls your workload and the way in which it is carried out, it suggests you are inside IR35 as you are not deemed as providing a specialist service.

3. Mutuality of obligation (MOO)

If both parties pass the above tests, it is unlikely that MOO applies as it will be deemed outside IR35 anyway. MOO can be present in both contracts of service and contract for service.

4. Risk – If a contractor can make a profit or a loss i.e. financial risk this would suggest that the contractor is outside IR35.

Independent IR35 Compliance Solutions are also available and will be able to support businesses who are unsure over the key criteria.

Complying with the new IR35 rules

Once the employment status of each contracted worker who works via an intermediary has been decided the next steps are:

• Keep detailed records of contractors and their SDS’s, including the reasons for determinations and the fees paid. Create a system to securely maintain these records.
• Have processes in place to deal with any disagreements that arise from the determinations. Disagreements may be made by the contractor or the company paying the contractor (for example a recruitment business). There is no time limit on make a challenge on the determination.
• Determine if you are the ‘fee payer’ and ensure that the determination is passed down the chain until it reaches the party that pays the PSC.

What steps should you be taking now?

• Look at your current workforce to identify those individuals who are supplying their services through personal service companies.
• Determine if the off-payroll rules apply for any contracts that will extend beyond April 2021.
• Talk to your current contractors about whether the off-payroll rules apply to their role and ensure that any amendments to the current contracts, packages and payment arrangements are agreed.
• Create a status determination statement for every current worker, taking ‘reasonable care’ when coming to the conclusion. Share with both the worker and the next entity in the supply chain (which could be a recruitment agency).
• Establish a challenge process which allows contractors to challenge their determinations and put a process in place to determine if the off-payroll rules apply to future engagements.

Resources:

HMRC - https://www.gov.uk/guidance/prepare-for-changes-to-the-off-payroll-working-rules-ir35

GOV.UK - https://www.gov.uk/government/publications/off-payroll-working-rules-communication-resources

CEST TOOL - https://www.gov.uk/guidance/check-employment-status-for-tax
SDS - https://www.brooksonlegal.co.uk/news/what-is-a-status-determination-statement-sds/

Change is always daunting but we hope that this brief overview has been useful. If you have any questions at all then please get in touch and we're here to support you in any way that we can.