IR35 legislation has been in force since 2000. In light of the recent Coronavirus pandemic, the government announced the new regime, which was set to take place on 6 April 2020, will now come into force on 6 April 2021. It is important that you understand the new rules before they take effect and how these changes may affect your business. We have put together this helpful FAQ sheet to answer any questions you may have about IR35.
What is IR35?
IR35 or off-payroll working rules is tax legislation designed to combat tax avoidance by workers and firms hiring someone who works in a similar way to a full-time employee (usually a contractor) but bill their services via a limited company (often referred to as a Personal Service Company or PSC).
The legislation is in place to ensure that individuals supplying services via their PSC who would be an employee if they were providing their services directly to the end client, are taxed as an employed earner rather than a self-employed earner.
What is changing from April 2021?
When IR35 was first introduced, contractors were responsible for self-assessment to determine whether they were caught by IR35. However, from April 2021, the new IR35 private sector rules shift the ultimate responsibility for assessing whether IR35 applies, from the contractor to the end client.
So, if as a business, you hire a PSC to supply its services to you, you are responsible to determine whether the individual would be deemed your employee if that individual did not have the protection of their company.
Which companies will have to comply with IR35?
Any medium or large sized business receiving services from a contractor, must comply with the new IR35 private sector rules. To be large or medium sized business, two of the three conditions below must be met:
- Turnover of more than £10.2 million;
- Balance sheet total of more than £5.1 million;
- More than 50 employees (employed by way of a contract of employment).
Small businesses which do not meet the criteria above will not be responsible for IR35 and the responsibility will remain with the contractor.
How would status be determined?
The key factors to consider are:
- Control – the PSC must not be controlled or there must be minimal control over the PSC by the individual.
- No mutuality of obligations – there must be no ongoing, regular obligation for the business to have to give the PSC work and the PSC must also have no obligation to accept work from the business. The PSC must be able to turn work down at its discretion.
- Substitute – The organisation must be willing to allow a substitute to carry out the work but with the PSC invoicing for the substitute’s work and being responsible for paying the substitute.
- Insurance – The PSC should have its own insurance in place to cover the services it provides.
- Financial risk – The PSC should bear the financial risk and if the contractor via the PSC bears very little financial risk, then it is likely the contractor would be deemed an employee.
IR35 applies to my business, what do I need to do?
As a business that is the end user of the services provided via a PSC, if you determine that in your view the contractor could be deemed to be an employee of your business, you must do the following:
- Give the contractor a Status Determination Statement (SDS); and
- Deduct PAYE and National Insurance for any fees payable to the contractor for work that is done from 6 April 2021.
- You will also be responsible to pay employers National Insurance Contributions.
If you decide that the contractor is not an employee, you will still need to ensure an SDS is completed to show why you would not classify the contractor as an employee.
It should be noted that even if the contractor is engaged via an agency, the end user will still have the ultimate responsibility to ensure that the appropriate assessment is done and will be ultimately responsible for the PAYE and employer National Insurance if the contractor is deemed to have been employed.
What is a Status Determination Statement?
An SDS is a summary explaining how you reached your decision about the IR35 status. There is no set template for an SDS, but it must contain the reasons for any decision and show how that decision was determined.
You must also communicate this decision to the contractor. If the contractor does not agree with your decision, the contractor can contest the SDS and you will have 45 days to review your decision, after which you must either confirm your decision or issue a new SDS with a revised decision.
If the contractor is determined an employee, will they have employment rights?
Potentially they may have employment rights, but surprisingly it is the case that it is possible for an individual to have a different status for tax purposes and for employment right purposes, so it would be on a case by case basis.
What happens if I don’t comply with the new IR35 rules?
If you try to hide the IR35 status of any individual working for you or are negligent in your review and determination of the situation, it is likely that HMRC will charge penalties to the business. It is vital that if you are unsure of a contractor’s status you seek specific legal and/or tax advice to avoid any penalties.
For further information, please contact Gill Brown or Jacqueline Kendal in our Employment team:
Please note we are also offering to undertake a review of your company to ensure you are not caught out by IR35. For more information, please contact us using the information above.
This article is current at the date of publication set out above and is for reference purposes only. It does not constitute legal advice and should not be relied on as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.