What is IR35 ?
IR35 is the UK tax legislation that has been designed to identify contractors and businesses which are avoiding paying the appropriate tax by working as ‘disguised’ employees or are engaging workers on a self-employed basis to ‘disguise’ their true employment status.
How will IR35 affect businesses?
The 6th April 2021 sees one of the biggest changes to the contracting industry. All businesses that engage with self-employed individuals, usually through a limited company (PSC), or as a sole trader, will have to re-evaluate their agreements with them. HMRC, who made changes to contractors working in the public sector in 2017, have now applied new rules to the private sector businesses. Companies will need to undertake checks to determine whether the worker is deemed as an employee, or as a self-employed worker for tax purposes. The onus is on the end client to make appropriate changes or see hefty fines.
Workers will be tested to determine their true status based on the new guidelines. If found to be inside IR35, the worker will have to be employed directly or through a PAYE umbrella to manage the worker’s tax affairs each week. This will likely mean that workers will pay more tax and NI while they will benefit from having greater benefits such as holiday and sick pay, and options to contribute to a pension plan.
There is still much speculation as to what the contractor landscape will look like post-April 2021, and in fact, whether further changes will be made.
Who does the IR35 off-payroll working rules apply to?
It will directly affect medium to large size businesses who utilise contract workers via a personal service company (Ltd) or individual sole trader will be subjected to the new rules.
It is likely that small companies will be unaffected but for clarity, it is any business that…
• Has an annual turnover of more than £10.2m
• Has a balance sheet total of more than £5.1m
• And employees 50 staff or more
Who ultimately manages the changes?
Businesses (End-Client) will be required to pass their employment status determination and reasons for the decision down the contractual chain to each party. In the employment food chain is likely to be recruitment agencies, consultancy services as well as smaller businesses that engage with the contract worker.
Who is at risk of facing compliance consequences?
This is a very sore subject, in that, if the PSC or any other party in the supply chain fails to account for PAYE & NICS, the liability will pass to the client as the end-user.
HMRC has caused an uproar around this as many believe that this is an unfair weight on the client, especially if they have taken every step necessary in order to incorporate the new rules correctly. HMRC has promised guidance on certain circumstances that will be acceptable, to not seek to recover from the end-user.
What happens if the worker appeals their employment status?
Businesses need to ensure they have a solid “status disagreement procedure” in place ready for the forthcoming changes in April 2021. There is a lot of pressure being put on clients to ensure everything is in order before then. Businesses need to think about the additional workload, staffing requirements & on top of this making accurate determinations, as they will become fully liable for the decisions. Any appeals that are not responded to the client will become accountable for the tax and NIC at state.
Again, HMRC has promised guidance on how clients will fulfil their obligations to take reasonable care and how to implement a “status disagreement process”. This is promised before the legislation takes effect, but clients should start now to think about how their process will look.
Can Businesses/Clients really trust CEST?
At this moment in time, people are lacking confidence in the Check Employment for Tax Tool (CEST). This was designed to help clients with determining workers' status. However, it was highlighted in recent tax tribunal cases that the tool wasn’t being applied correctly, resulting in battle losses for HMRC.
Following this, HMRC promises that a support package will be released this summer – including a new and improved CEST.
So what next?
Futurelink urges all organisations caught by the legislation to take action immediately – not just after the 6th April! We recommend that you take a step back to assess the level of risk and put procedures in place to ensure that businesses and workers can comply with the new rules.
The key to adhering to IR35 is to prepare and plan ahead, evaluate and implement new processes which we would be happy to guide you on. The Futurelink Group provide fully compliant payment solutions that will protect workers’ self-employed or PAYE status.
To find out more please speak to one of our consultants on 01923 277900 or email .