The biggest change to employment tax for decades will come into force in just five months’ time when the proposed IR35 reforms finally take effect in the private sector.
The new off-payroll working (IR35) rules will be introduced a year later than anticipated in light of ongoing coronavirus challenges. Its effects are set to be huge – it is estimated the changes will impact 170,000 consultants, 60,000 end-users and generate additional tax revenue of £3.1billion between 2020 and 2024.
This is largely because the system in its current form is just not working as HMRC intended. Put another way, HMRC is not receiving the tax it believed and expected it would generate from the original introduction of IR35.
The IR35 rules were brought into the UK in 2000 to ensure that individuals working like employees but operating through a Personal Service Company (PSC) or “intermediary” (i.e. a limited company that provides a service), pay broadly the same tax and NIC as an employee would. The rules, however, have been largely ineffective as the responsibility for assessing whether the rules apply has been with the PSC.
The new reforms will see a shift in responsibility for assessing whether IR35 applies from the PSC to the end-user. The end-user will have to determine whether an individual who is engaged through the PSC or intermediary would, if they were directly engaged by the end-user, be an employee of the end-user. If the end-user decides that they would have been their employee, then it is the organisation in the supply chain which actually pays the PSC/intermediary who is deemed to be the “employer” and responsible for paying the individual as if they were an employee. In addition to deducting tax and N.I. the employer will also have to account to HMRC for employers N.I (currently charged at 13.8%).
The reforms will apply to any payments made on or after 6 April 2021, unless all the contractor’s labour was provided before that date.
Small business exemptions
The new rules apply to ‘medium or large’ sized businesses in the private sector and all organisations in the public sector (as has been the case since 2017). There’s an exemption for end-clients who are ‘small businesses’ which means meeting two or more of the following criteria:
- Annual turnover is no more than £10.2 million
- Balance sheet total is no more than £5.1 million
- No more than 50 employees.
Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of an assignment remains with the PSC and the new rules do not apply.
Determining employment status
HMRC’s Check Employment Status for Tax (CEST) online tool is designed to help employers and workers determine how work being done should be dealt with for tax purposes. Despite a 2019 revamp, it has faced a lot of criticism in respect of its functionality and the end-user is not obliged to use the tool. However, providing the end-user and not the contractor correctly enters the information and keeps it up to date, HMRC are bound by the result.
End-users will remain responsible for determining whether an individual is ‘inside’ or ‘outside’ of IR35 rules even if (as happens in a significant number of cases) CEST produces no definitive answer. In such instances regard will have to be had to the substantial body of Case law which has been developed on this issue and which has also identified several key (but non-exhaustive) factors for end-users to consider when making this assessment:
- You carry out all of the work that your company is contracted to do personally
- You work for your own limited company, but receive employment benefits such as paid leave or sick pay
- You are being paid on a time basis
- You are closely supervised by someone in your client’s business
- You are supplied with equipment by a client and work at their premises
- You work for one client long-term
- All rejected work is corrected at your client’s cost
- You do not have your own business identity
- You have the right to delegate or substitute work contracted to another person and that right is exercised in practice
- You work for your own limited company and do not receive employment benefits such as paid leave or sick pay
- You are paid on a project basis or at a fixed price
- You have the right to decide how and when you work and can send a substitute to do the job if you please
- You supply the appropriate equipment and may work from your own premises
- You work with more than one client at one time or on short successive projects with a variety of clients
- All rejected work is to be corrected at your own cost
- You have your own premises, insurance and branding
If you require any assistance in determining employment status or you need advice in respect of the new IR35 changes, please do not hesitate to contact a member of employment our team either by email at [email protected] or call 01737 854 500.
You have until 6 April 2021 to get your affairs in order!