What is happening and when?
What: The Government is extending the off-payroll rules, which have applied in the public sector since 2017, into the private sector. The rules will apply to all work done by contractors working through a personal service company.
There are tests for determining IR35 status (more information on this below) are not changing but the responsibility for making the status decision and the related deductions are.
When: The extended rules will apply from 6th April 2021, to all work done on or after this date.
What is the difference? From 6th April 2021, the client – not the contractor, will be responsible for assessing IR35 status.
Small companies will be exempt from the changes. A small company as defined by HMRC is one which meets two or more of the following criteria a) annual turnover of not more than £10.2 million b) balance sheet total of not more than £5.1 million or c) no more than 50 employees.
Where organisations are exempt, the existing IR35 rules (where the contractor is responsible for applying the rules) will continue to apply.
When an organisation becomes or ceases to be small in an accounting period, for the purposes of the off-payroll rules, that change will apply from the start of the tax year following the end of that accounting period, irrespective of whether the organisation is incorporated or unincorporated.
HRMC have stated there will be anti-avoidance measures to prevent organisations restructuring to avoid the rules.
If your company is classed as a ‘small company’ it is your responsibility to inform us of this and the reasons why, using a small company exemption form. We can provide a template form to you if required.
A very brief history
IR35 was introduced to address the problem of people working through personal service companies to avoid paying employment taxes.
Through a limited company, someone can split any Income Tax and National Insurance Contributions due between a low salary and high dividends – thereby securing a higher take-home pay than an employee.
From April 2021, if IR35 applies to a contract, it means the worker will have to pay the same Income Tax and National Insurance Contributions as they would if employed directly rather than contracted to work through their limited company.
It is now your responsibility as the end-client to make the status determination and so, there are some things you should do to prepare.
Assess if your company will be affected or exempt from the off-payroll rules, because of the small company exemption. If exempt, let us know, explaining why.
Identify who within your company can make IR35 status decisions and be sure that those individuals understand how to assess status, and have the appropriate tools to do so.
Assess who amongst your contractor population might be affected by these changes and why. We can help with this by providing information on the contractors that have been supplied by us.
Put processes in place to ensure the Status Decision is passed down using a Status Determination Statement (SDS); it needs to be provided to us, the agency and the contractor, along with the reasons for the decision.
If you don’t have an internal person to do IR35 status decisions, consider using an external provider. We can provide you with some options of well-established reviewers if needed.
Making the Status Determination
You will need to understand the IR35 rules and use an appropriate assessment tool to reach an accurate IR35 status decision.
In 2017, when these rules were rolled out to the public sector, the Government introduced the Check Employment Status for Tax facility (CEST), which is an online tool. It has come under significant criticism and the Government has been working to enhance it. HMRC have stated that they will stand by CEST outcomes provided the information input is accurate and has not been contrived to steer a result one way or the other.
It is important to note that using the CEST tool is not mandatory and you can use any assessment method you wish, provided you take ‘reasonable care’ in making tax status decisions.
It is important that roles are assessed correctly, and companies do not make ‘blanket decisions’ i.e. ‘all contractors are inside IR35’ or ‘ all contractors are outside IR35’. If reasonable care is not taken in decision making, you, the end-client, will be liable for unpaid tax and national insurance.
Passing the status decision on
Having made the tax status decision, you will need to pass the decision down the supply chain, along with the reasons for coming to that decision.
We can provide a blank Status Determination Statement template if needed that you can use in your internal processes.
The decision needs to be passed on, together with the reasons for coming to that decision to:
1. The party that they contract with (usually us, the agency)
2. The contractor.
If the contractor disagrees with the status determination made, they can start a ‘client-led disagreement process’ to be managed by your company. You must respond to this within 45 days of receiving the query and you must either:
a) confirm that the representations made by the contractor have been considered, but it has been decided that the original SDS is correct, and give reasons for that decision
b) give a new SDS containing a different conclusion, and state that the previous decision has been withdrawn.
Again, this decision needs to be passed to us, the agency, and the contractor.
If you require any contractor information during your preparations for the changes to IR35, please don’t hesitate to contact us on 01934 635025.
Published January 2021 The information contained within this document is correct at time of writing. It is provided as general background information and should not be taken as legal or financial advice.