Debbie Sadler, senior associate in the employment team at Blaser Mills Law, discusses what the new IR35 off-payroll regulations mean for private sector firms and how they can ensure compliance
Since April 2000, contractors who provide their services via an intermediary – such as a personal services company – and the firms that hire them have had to meet the requirements laid out by a set of regulations known as IR35.
IR35 aims to prevent individuals who enter into contracts with other businesses from avoiding paying the necessary income tax and National Insurance Contributions (‘NIC’) by ‘disguising’ themselves as ‘workers’ rather than ‘employees’.
In April 2017, the government introduced changes to IR35 aimed at tackling perceived tax avoidance. These ‘off-payroll’ regulations initially applied only to the public sector but were due to be extended to all medium and large private sector firms – including some charities and third sector organisations – from April 2020, although this was delayed until 6th April 2021 due to the pandemic.
The new regulations
Following the introduction of the new regulations, the obligation for individuals operating through an intermediary company to determine their employment status and deduct and pay any PAYE and NIC to HMRC has transferred to the engaging entity or end client.
Further to this, end clients are mandated to undertake an IR35 assessment – which determines the individual’s employment status – before making any payment to the intermediary for services rendered after 6th April 2021.
The new tax rules apply to all medium and large private sector companies, i.e. those that meet two or more of the following conditions:
- They have an annual turnover of more than £10.2 million
- They have a balance sheet total of more than £5.1 million
- They have more than 50 employees
Where the rules apply, business owners can expect to pay around 25% more in tax per year which could have a significant impact on the financial health of their firm.
How businesses can ensure they are compliant
A survey conducted in January 2021 by software development company IR35 Shield found that 52% of those currently in work were yet to have their IR35 status assessed by the end user, suggesting that many businesses were unprepared for the changes.
While it is believed that many firms are still yet to address the new rules due to their focus on dealing with the economic impact of COVID-19, it is crucial for business owners to consider how their organisation may be affected as this is likely to impact on the financial viability of the arrangement and the terms of the parties’ agreement
The first step is to identify whether the end user falls within the off-payroll regime. If it does, it will need to determine the employment status of all its staff (including contractors) in order to ensure compliance with the regulations.
The Government’s Check Employment Status for Tax (‘CEST’) service can assist companies in determining whether the off-payroll working rules apply. However, applying this test is not infallible and recent decisions in the UK’s Tax Tribunals have suggested that it may not be completely effective in determining an individual’ employment status in every scenario.
When establishing the status of the individual, business owners should consider what the individuals’ responsibilities are, who controls what they do – i.e. when, where and how they work, how they are paid, and whether they are directly in receipt of any benefit or expense. These are all relevant to the determination of employment status.
As part of carrying out an IR35 assessment, firms are required to provide the outcome in the form of a Status Determination Statement (‘SDS’), which must be passed to the individual and the person or organisation that they are contracting with, giving the conclusion of the employment status determination and the reasons for reaching it.
Reasonable care must be taken when determining the employment status of the individual, as failure to do so will result in the individual’s income tax and NIC becoming the end client’s responsibility.
Also, given the additional costs that the law change will bring for businesses, it is important that employers take the time to consider the true impact on their company, as well as the additional payroll burden.
Termination of work contracts must be conducted in accordance with the existing legal framework to avoid litigation in the future.
Furthermore, companies must have a dispute resolution process in place should a contractor wish to dispute their IR35 determination, though a challenge will be unlikely where an individual is deemed to fall outside of IR35.
Firms must also ensure that they maintain detailed records of their employment status determinations, (including the reasons for the determination and the fees paid), have processes in place to deal with any disagreements that arise from the determination, and confirm the size of their organisation if asked by the person or organisation that they contract with, or the individual.
Now that the new legislation has come into force, it is highly likely that some engagers and contractors who have failed to prepare for compliance will experience repercussions as a result.
Many companies are already applying blanket rules to negate their compliance obligations, and it is not inconceivable that a variety of disputes and recruitment issues will arise as a consequence.
Business owners who are unsure about how they should approach their IR35 obligations should seek guidance from a legal professional who can help them to understand the new regulations and ensure they are compliant.