The introduction of the changes to the off-payroll rules, known more commonly as IR35, will have a considerable impact on UK businesses.
The new rules, which come into force from 6 April 2021, mean that the assessment of a contractor’s deemed employment status will transfer from the contractor to the engaging client, and others in the contractual supply chain, such as agencies for medium and large-sized companies.
The above rules are already operational within the public sector and are being extended to those contractors working via personal service companies (PSCs) in the private sector for companies which meet 2 or more of the below conditions:
- Your company has turnover of more than £10.2 million
- Your company has a balance sheet total (asset before liabilities) of more than £5.1 million
- Your company has more than 50 employees
What is a PSC?
A PSC is a company where there is typically a lone employee or officeholder, which supplies that individual’s services to a business.
HM Revenue & Customs (HMRC) claims that operating under these arrangements offers contractors, and those that engage their services, with several distinct advantages – not least the potential tax savings that come from the flexibility of being taxed via Corporation Tax at 19 per cent. The individual is also able to plan in relation to profit extraction and having the ability to withdraw income through dividends which are usually taxed at lower income tax rates.
Many businesses have also encouraged the use of PSCs as they provide increased flexibility and reduced payroll costs to them.
What do employers need to do?
From April this year, in the circumstances mentioned above it will be up to the end client to identify which employees fall within the regime via a confirmation statement. This statement must be made before work starts, or for those already working via a PSC before legislation comes into force in April.
Once this decision on employment status is made, it must be passed to the contractor if the hire is direct, or to the next in line in the supply chain where one or more agencies are involved so that HMRC can be informed.
A tax obligation on the fee-payer arises where the decision is that the arrangement involves a deemed employment status.
In that event, the fee-payer must charge PAYE and NICs through payroll on the gross amount of the PSC’s invoice. The fee payer is then responsible for paying the net amount to the PSC, thereby significantly reducing the amount of money that the PSC has available to pay the individual.
Businesses that fail to provide a statement to HMRC and do not pay the tax due under IR35 will be liable for any outstanding amount and, therefore, the risk of non-compliance ultimately sits with them as the end-client.
HM Revenue & Customs (HMRC) has also announced that the new off-payroll working rules in the private sector will not apply to work undertaken before 6 April 2021.
HMRC had said previously that the new rules, which transfer the responsibility for determining an individual’s tax status from contractors to employers, would apply to all payments made from 6 April 2021, irrespective of when the work was carried out.
PSCs providing services to small companies will remain under the original IR35 rules meaning that the responsibility remains with the individual PSC through which the worker provides the service.
Those who are genuinely self-employed should not be affected by theIR35 rules.
How to classify a worker
Businesses and agencies will be able to use the Government’s Check Employment Status for Tax (CEST) service, which is available to help businesses determine whether the off-payroll working rules apply.
When considering the status of an employee you should consider:
- What are the worker’s responsibilities?
- Who controls the individual (i.e. when, where and how do they work)?
- How they are paid?
- Are they directly in receipt of any benefit or expense?
Evidence suggests that some large employers in the public sector have taken a blanket approach to include all contractors under the rules to avoid a penalty or reputational damage.
However, employers should take a cautious approach when applying the rules and take time to identify each person’s status on an individual basis to prevent legal action being taken against them.
Contractors who feel they should not be given deemed status can appeal a decision with the end client, but the ultimate decision whether to accept or dismiss an appeal lies with the end client.
Businesses must not wait until April 2021 to respond to this legislation, as HMRC has said it will begin robustly reviewing compliance as soon as the new rules become law.
In the first instance, a business needs to identify whether it meets the medium or large company definition. If yes, they need to analyse how many PSCs they engage with and in what part of the business they operate.
Once a business has identified its PSC population, it needs to undertake a comprehensive risk assessment to establish its exposure to IR35 and to review whether changes need to be made to their PAYE procedures.
Please click the appropriate link below, depending on your circumstances, to download our guide to IR35.
If you are struggling to get to grips with IR35 and need assistance it is important that you speak to our team.
