If you are a business hiring contractors or you are self-employed, you will have heard about IR35. It’s essential for contractors, recruiters, and employers to understand the rules around off-payroll working, also known as IR35, as new changes come into effect in April 2021.
Below, we have put together some answers to frequently asked questions that will help you understand more about IR35 and the changes to come.
What is IR35?
Back in 2000, HMRC introduced the ‘off-payroll working rules’ (IR35) to tackle ‘disguised’ employment. This is when a contractor is essentially working as an employee but taking advantage of the tax efficiency of working through a limited company. If a contractor is caught doing so, they will be required to pay any tax and national insurance (NI) due as if they were an employee – resulting in a significantly bigger tax bill than usual.
The introduction of the new IR35 rules was designed to assess whether a contractor is genuine rather than a ‘disguised’ employee, to ensure they pay the correct amount of tax.
IR35 tends to apply when the following conditions are met:
The individual performs services for a client.
The work is provided under a contract involving an intermediary.
The services are provided under an agreement between the client and contractor, meaning the contractor is classed as an employee.
What is the Status Determination Statement?
A status determination statement (SDS) is a comprehensive statement from the client which declares a contractor’s deemed employment status following an IR35 assessment, detailing reasons for reaching this conclusion.
Under the new IR35 rules, the employer (referred in the law as the ‘end client’) will be made accountable for any IR35 judgements. Previously, this determination was left to the contractor to decide. Now it is up to the end-client to choose using reasonable care and share this, in addition to any reasoning behind the decision, to all parties in the supply chain.
End-clients must take ‘reasonable care’ when making a status determination decision. HMRC has stated blanket decisions (i.e. that an entire workforce is caught by the off-payroll rules) does not constitute ‘reasonable care’ – and is of bad practice.
According to the new rules, all clients must demonstrate that they have assessed IR35 correctly but may be expected to take a higher degree of care by larger companies that have more significant resources to contribute to compliance. Should the client fail to provide ‘reasonable care’, they will inherit liability, whether they are the relevant ‘fee payer’.
What’s considered in an IR35 decision?
IR35 will affect contractors who work in the same way as an employee of their end client but get paid via an intermediary – (i.e. their own limited company). Determinations are dependent on several criteria:
Control –this is often grouped with ‘supervision’ and ‘direction’ referring to the level of control the contractor has over the work executed. A contractor must not be under the direction or control of the client business. They must have the freedom to carry out the contract, using their expertise, as they see fit. If you are in charge of how your contract is completed and work according to your schedule, this suggests you have the necessary control over what you do, leaving you outside IR35.
The Right of Substitution –this relates to the services of the person with significant control (PSC). It is the right of a contractor to send a replacement to perform services for the client on their behalf. Typically, the PSC selects a contractor on the criteria and agreement of the client (usually the sole employee of the PSC). However, for an assignment to fall out of scope, the business must be willing to accept a substitute contractor (through the same PSC) should the originally selected contractor not be able to complete part of the work. The business isn’t allowed to interview the replacement contractor and must accept the choice of the PSC. For a contract to fall outside IR35 rules, it should specify that a substitute contractor can complete work on your behalf.
Mutuality of Obligation –this refers to a shared obligation between the worker and the work provider (client). The contractor mustn’t do any other work for the business, and the company is not obliged to provide additional work outside the contract, nor on completion. This constitutes a contract of employment. If your agreement states that you can’t take on different clients while working for your current client, it could mean you fall outside IR35 rules.
If you pass the above criteria, you will be classed as ‘outside’ of IR35 rules and can continue to invoice and pay yourself through your own limited company. If you are deemed ‘inside’ IR35 and HMRC declare an employment relationship, tax and National Insurance will be deducted from earnings and any liability for missing tax is the client’s responsibility.
Who’s affected by the IR35 changes? And how?
Firstly, the legislation applies to medium and large businesses. If you are classed as a small business with less than 50 employees, typically under £10m turnovers, these changes don’t apply.
The changes in IR35 will not necessarily affect the self-employed, sole traders and umbrella companies. HMRC decided that instead of the contractor, the end-client will determine their IR35 status with the fee-payer picking up the IR35 liability. This means some umbrella companies will be affected if they manage the accounts for contractors and pay them as a PSC.
You may be affected by IR35 if you are:
a worker who provides their services through their intermediary
a client who receives services from a worker through their intermediary
an agency providing workers’ services through their intermediary
Will IR35 changes continue to go ahead?
This is the most frequently asked question, and our answer is yes, we believe so. The changes made to the off-payroll rules were due to come into effect on 6 April 2020. This has since been delayed until April 2021 to help businesses deal with the economic impact of COVID-19.
The delay is not a sign of cancellation with the changes being made law in July 2020. This means that HMRC would have to apply to challenge the law for the changes to be cancelled.
What happens if my contract runs post-April 2021?
You should proceed ahead as though the legislation is already in place and undertake a full status determination statement. To do so, you need to make sure suitably qualified people carry out the SDS within the client business. The role and activities taking place must be thoroughly interrogated to make sure the answers given are answered correctly and in full as this is key criteria for HMRC. The status determination must be communicated throughout the recruitment supply chain.
Do you require further help?
With the changes to IR35 going ahead in April 2021, we can provide you with a solution that removes the risk of an HMRC challenge through a compliant status determination tool.