IR35 and the Off payroll Working Rules – changes from April 2021

Changes to the off-payroll working rules (IR35) for the private sector were due to take effect last year in April 2020. Like most things, the COVID-19 pandemic delayed the rollout of these changes but they are now due to take effect from 6 April 2021. For most businesses involved in the use or supply of off-payroll workers, this will mean reviewing the preparation or revising the steps they were ready to take last year. For some, the 12 month delay may have provided them with a window, albeit a very small one, to get to grips with and prepare for these new changes.

This e-briefing will explore the key changes to the current IR35 rules, the circumstances under which the new rules will apply and explain the position from 6 April 2021.

The old regime

IR35 refers to anti taxi avoidance legislation and is not a new concept. It was originally introduced in 2000 and applies where an individual (the “worker”) provides services, personally, to another person (the “client”) through an intermediary, such as a “personal service company” (“PSC”). 

The presence of a PSC avoided any direct contractual relationship between the worker and the client company and the absence of a direct contractual relationship meant that there could be no employment relationship between the parties. This meant that both parties could benefit from the more favourable, self-employed tax regime.

The IR35 provisions were introduced to close this loophole. At present, if a worker personally performs services for a client via their own PSC, and if the circumstances are such that were the services provided directly under a contract between the client and the worker, the worker would look like any other employee of the client, the worker will be regarded as an employee of the client for income tax/NIC purposes. The worker’s PSC is responsible for assessing the worker’s employment status and for deducting any tax/NICs due under PAYE, as necessary.

The new position

From 6 April 2021, the responsibility for determining whether the IR35 rules (also known as the “off-payroll rules”) apply falls to the end-user client and not to the PSC.

These rules only apply if each of the following "gateway tests" are met:

  • the client is a medium or large entity (defined below) and has a UK connection;
  • the agency legislation does not apply, and the worker is not a “visiting performer”;
  • the worker is providing services to the client and not to an outsourced service provider;
  • the worker's intermediary is a relevant intermediary; and
  • the worker is subject to UK tax or NICs.

The “end-user client” is the entity for whom the worker provides services. This is generally (but not always) the highest entity in the contractual supply chain. It is important to identify the “end-user client” correctly because it is responsible for undertaking the worker’s employment status determination (“status determination”) - (i.e. they must decide if the worker, to all intents and purposes, looks - and is treated - like one of its own employees, or if the worker is genuinely self-employed and why) and communicating this to the party it contracts with as well as to the individual worker.

If the result of that status determination is that the worker would look like the client’s employee, the “fee-payer” (i.e. the entity which pays the PSC) must operate PAYE in respect of that worker by making the appropriate deductions for tax and national insurance contributions and pay the apprenticeship levy (if applicable).

When is the client a “medium or large” company?

A client company which satisfies at least two or more of the following conditions will be classified as a “medium/large” company for the purposes of off payroll rules:

  • they have an annual turnover of more than £10.2 million; and/or
  • they have a balance sheet total of more than £5.1 million; and/or
  • they have more than 50 employees.

To assess whether a client company is “small” or “medium/large”, figures from all members (worldwide) of the group headed by the parent company are aggregated. The size determination then applies to all members of the group.

However, a newly incorporated company, even if a member of a group, is treated as “small” until the beginning of the first tax year after the period for filing its accounts for that first financial year.

If the client company does not satisfy the “medium/large” definition, the old IR35 rules will still apply – i.e. if the worker is providing their services through an intermediary/PSC, the intermediary/PSC will need to assess the worker’s employment status and operate PAYE if necessary.

Status determination

Establishing whether the worker would be considered an employee is key.  It does not matter if the contractual documentation specifies that a worker is self-employed.  Ultimately, if what happens in practice is not indicative of self-employment, the worker will be deemed to be an employee – and taxed as an employee.

When carrying out a status determination assessment, it may be useful to consider the original hallmarks of employment status such as mutuality of obligation, control and personal service in order to determine whether the worker will be deemed to be an employee.

The end-user client must carry out the status determination before the contract starts (or, for ongoing contracts, before the first payment is made under that contract on or after 6 April 2021).

HMRC’s online tool, Check Employment Status for Tax (“CEST”) can assist with tax treatment and the application of IR35. While there is no obligation to use the tool, if the client uses the tool appropriately and updates it where required, HMRC should accept the results determined by CEST. Further information can be found here.

Please note that “reasonable care” must be taken when determining each individual worker’s employment status. Blanket decisions on the status of a contractor workforce will not be accepted.  Clients need to be able to justify their decision by reference to the various tests for employment status (as referred to above) and be able to explain why the determination falls within or outside the scope of the off-payroll regime.

Liability for non-compliance

Undoubtedly the biggest risk for non-compliance is tax liability but risks may also include penalties and interest. Circumstances under which liability can arise include:

  • failure to produce the status determination statement;
  • producing an inaccurate status determination statement;
  • failing to operate PAYE as required;
  • not responding to a written request for reasons for the status determination within 45 days; or
  • failure to take reasonable care when making status determination.

It is important to identify correctly who is the end-user client and the fee payer/deemed employer in a labour supply chain as where a party sits within that chain will determine their responsibilities and obligations under the off-payroll regime. Failure of a party to comply with its off-payroll obligations may affect where liability falls.  For example, if an end-user client fails to respond to a written request for reasons for the status determination within the 45 day period, or fails to take “reasonable care” when making the status determination, liability remains with the “end-user client” and the obligation to operate PAYE will sit with the end-user client instead of passing to the “fee payer”.

Next steps

In order to prepare for these upcoming changes, we recommend taking the following steps:

  • Conduct an audit of your contractor arrangements. Identify where agencies are being used to supply workers and review the terms of those engagements. Consider whether any current contractors fall within the existing IR35 provisions.
  • Assess your labour supply chains(s) and any relevant contracting terms. Identify who is the end-user client in the chain(s) so that you know who is responsible for making the status determination.
  • When carrying out the status determination, decide if you’re going to make use of the CEST tool (as discussed above) or if you are going to seek external support from legal advisors and accountants.
  • Put in place a procedure that will allow you to communicate the status determination to contractors, agencies and the worker in good time and will allow you to respond to requests within the 45 day timeframe.

For further information on how to prepare for the new rules, status determination and what steps to implement, please contact Prettys Employment Team on 01473 232 121.

Legal disclaimer: the contents of this E-briefing does not constitute legal advice and is provided for general information purposes only.

Maria Spencer