It is almost a year since private sector companies almost experienced the biggest change to their responsibility to correctly determine the employment status of the contractors they engage.
Postponed from April 2020, this time around, the new off-payroll working rules, more commonly known as “IR35” are set to come into force as of 6 April 2021.
A reminder: What do these “IR35 Rules” potentially mean for your company?
If you are a medium or large sized private sector company, the onus will be on you to make sure that if you are paying an individual for services provided through a personal service company or another type of relevant “intermediary”, that you apply the correct tax treatment.
The responsibility is shifting to the private sector company engaging the staff to make a determination of employee status (or not) and then ensure PAYE and NICs deductions are paid to HMRC, if necessary.
Check again: Are you a “medium” or “large” private sector company?
The rules will apply to your company if two or more of the following conditions apply:
- an annual turnover of more than £10.2 million;
- a balance sheet total of more than £5.1 million (that is, the total amount shown as assets on the balance sheet before deducting liabilities); or
- over 50 employees.
Also, a red flag to any smaller subsidiaries that appear to fall outside of the rules based purely on their own size. They too will be caught by the rules if their parent company is a “medium” or “large” private sector company, even if the subsidiary itself is not.
What is a relevant “intermediary”?
This will usually be a contractor’s personal services company that is a limited company. However, it could also be a partnership, a managed service company, an agency or another person.
Thankfully, as a result of some last-minute tweaks to the legislation, we now know that individuals who provide services via an intermediary and their payments are already being wholly taxed as employment income (i.e. less income tax and NICs in full) they will be outside the scope of the IR35 Rules. This is most likely to be relevant in respect of an agency or umbrella company who are providing contractors.
Another helping hand for the engaging company to make the correct determination is that there is an obligation on the intermediary to confirm if they are already treating payments to the contractor as employment income, and as such, if the contractor is inside/outside scope of the IR35 Rules.
Your company is yet to catch up with the changes? What next?
A review and determination of the employment status of every contractor who operates via an intermediary will need to be carried out. It is a legal requirement for a medium or large sized private sector company to keep relevant records of their decision making and processes. Therefore, a robust paper trail is a must.
Take “reasonable” care when making the determination in respect of each relevant individual, including:
- use the employment status principles in the HMRC Employment Status Manual and apply HMRC guidance;
- complete the HMRC’s Check Employment Status for tax tool;
- take professional advice; and
- if there are material changes in circumstances, ensure a new determination is made.
Back to the robust paper trail. Each relevant individual must be sent a “Status Determination Statement” confirming the outcome of the determination, and the reasons for it, before the first payment date that falls on or after 6 April 2021.
It is also a legal requirement to introduce a process that allows you to deal with any disagreement over your determination. Address any challenges to the determination that are received.
For any individual who is deemed as having employee status, the necessary income tax and NICs deductions will need to be made. Employment legal advice should be sought to ensure that all contractual provisions are legally compliant.
What happens if you have made an incorrect determination?
The Government has clarified that HMRC’s focus will be on compliance with the new rules post 6 April 2021 as opposed to investigating the historic determinations of past arrangements. Unless, that is, it has reason to suspect fraud or criminal behaviour. However, going forward, if a company fails to comply with the new rules, HMRC reserves the right to charge penalties in addition to recouping the relevant deductions post April 2021.
Often billed as a headache for private sector companies since its conception, the IR35 changes look like they are finally becoming a reality. For some companies another year to prepare has been welcome to ensure future compliance and carry out a deep dive into their engagements of contractors and personal service companies. While for others, further growth and expansion may now have tipped them into the ambit of the IR35 Rules and a new world of IR35 determinations.
It’s time to double check your company’s legal obligations ahead of the IR35 Rules (again).
If you have any questions about IR35 or any other employment law issues please contact Helen Unger