Many companies breathed a collective sigh of relief last spring when the implementation of the off-payroll working rules in the private sector (IR35) were postponed for a year. However, despite ongoing speculation, the government is pressing on and the new IR35 rules will operate as intended from 6 April 2021.
Companies will be forgiven for forgetting what IR35 is, let alone what they should be doing to prepare, given the competing pressures they have had to contend with this year.
As a reminder, the IR35 rules apply to any individual who provides services to a business through an intermediary (either through their own personal services company (PSC) or via an umbrella company) but who, without that intermediary, could otherwise be an employee of the end-user client.
The reform shifts the responsibility for determining a contractor's employment status for tax purposes away from the contractor and onto the end-user client. This will apply to organisations in the private sector with an annual turnover in excess of £10m and a workforce of 50 or more employees (medium to large enterprises), irrespective of how the contractor supplies its services. This assessment will not change the contractor's status for employment law purposes.
HMRC has created, and already refined, an online tool called Check Employment Status for Tax (CEST) to assist end-users in carrying out the status determinations. There is no obligation to use the CEST tool, but it does helpfully flag particular matters on which HMRC is focusing and, where completed accurately and kept updated by the end-user, can bind HMRC to the outcome generated.
Once the end-user has determined whether the contractor is employed or self-employed for tax purposes, it must confirm its position together with its reasons in a Status Determination Statement (SDS). The SDS must be shared with the contractor and the agency/intermediary (where one operates) before processing the payment to the contractor.
The end-user must have a dispute resolution process in place should a contractor wish to dispute its IR35 determination, though a challenge will be unlikely where a contractor is deemed to fall outside IR35.
Where the end-user determines that the contractor falls outside IR35, the PSC can continue to be paid in gross. If the contractor is deemed to fall within the IR35 rules, the fee payer will be responsible for operating PAYE, deducting employee National Insurance contributions on the fees it pays the PSC (excluding VAT) and paying employer National Insurance contributions.
Updates to the new rules
- The new rules are incorporated in the Finance Act 2020 which received royal assent in July. However, there are a few key updates that have evolved during the pandemic.
- The IR35 reforms will only apply to services provided on or after 6 April 2021. If the services are provided in full before 6 April 2021 but payment is made on or after this date, the new rules will not apply to the payment. Where services have started, but not yet been completed, before 6 April 2021, the rules will only apply to the portion of the payment that relates to services falling after 6 April 2021.
- The end-user client must have a UK connection – simply having a connection through a UK-based ‘permanent establishment’ will be enough to bring it in scope of IR35. Where there is no UK connection at all, the new rules will not apply to the end-user.
- There is now an obligation on end-user clients to confirm whether they are exempt due to their classification as a small company in accordance with the definition of ‘small’ under the Companies Act 2006.
- With regards to intermediary companies, the draft legislation was limited to companies in which the contractor held a material interest of at least 5 per cent. This threshold has been lowered and now also includes any company from which the contractor has received, or is entitled to receive, a payment.
It may seem that April 2021 is still in the distant future, especially given the ongoing changes many businesses continue to face as a result of the pandemic.
However, there does not appear to be any intention to postpone the off-payroll reforms for a second time and so preparation will be key. Companies are encouraged to step up their arrangements now to ensure the groundwork is done in advance and, hopefully, to avoid a last minute panic come spring.
Helena Rozman is an employment associate at Dentons