IR35 - What you need to know
The IR35 reform came into effect at the start of the 2021/2022 financial year on 6 April. Here, Vanessa Bell, head of the employment team at Ipswich-based law firm Prettys discusses what this will mean for businesses and what employers will need to do to make sure they are compliant.
IR35 which is also known as the “off payroll working rules” is an anti-tax avoidance measure that was first introduced in 2000 by Chancellor at the time, Gordon Brown.
The legislation is designed to help HMRC close a loophole and claim tax and National Insurance contributions where businesses (the “client”) contract with workers/contractors via an intermediary on a self-employed basis, even though the working relationship is, in reality, more like an employment one.
The changes to IR35 rules for the private sector were scheduled to take place in April 2020, but this was postponed to 2021 due to the pandemic and came into effect on 6 April this year.
The new provisions mean that client companies who work with contractors via an intermediatory (the most common one being a Personal Services Company (PSC)), may be responsible for determining whether the IR35 rules apply and also potentially responsible for deducting any tax/NICs due under PAYE, as necessary. Previously, the worker or contractor’s PSC was responsible for assessing the worker’s employment status and for deducting any tax/NICs due.
The IR35 changes are also relevant for businesses who work with agencies to supply their workers, where there is an intermediatory between the worker and the agency.
These new rules will only affect medium and large client companies, and there are prescribed conditions that need to be met to be classified as a “medium/large” company for the purposes of the off payroll rules. If the client company is “small”, then the old IR35 rules still apply (so the intermediary/PSC will need to assess the worker’s employment status and operate PAYE if necessary).
As a starting point, it is important to identify correctly who the “end-user client” and the “fee payer” are in the labour supply chain, as where a party sits within that chain will determine their responsibilities and obligations under the IR35 regime. The “end-user client” is generally (but not always) the highest entity in the contractual supply chain and is responsible for undertaking the worker’s employment status determination. The “fee payer” is the entity that pays the PSC.
When carrying out worker’s status determinations, establishing whether the worker would be considered an employee in practice 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. This means that for businesses working with several contractors (via intermediaries), a separate status determination will need to be considered and prepared for each contractor as the end user client must be able to show that they have taken reasonable care when determining each individual worker’s status. Blanket decisions on the status of a contractor workforce will not be accepted.
If you are a business and are worried that you may be affected by IR35, it’s important to assess your current workforce and 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 IR35 provisions. Assess your labour supply chain(s) and identify who is the end-user client so that you know who is responsible for making the status determination.
When carrying out the status determinations, you may wish to make use of the HMRC’s online tool, Check Employment Status for Tax (CEST). This is an online tool that can help you determine the employment status of a worker and assist with the tax treatment and application of IR35. This can be done anonymously and is a good place for businesses to start.
IR35 can cause confusion and challenges for companies, but the implications of not conforming can be huge. This is why it is advised to seek legal advice and support to ensure you know exactly where you stand. Maintaining a clear audit trail throughout is vital during this process.
It’s important to remember that there is no “one size fits all” approach when it comes to IR35, so all cases should be reviewed on an individual basis.
To find out more information or to speak to an expert, contact Vanessa Bell, Head of our Employment Team by 01473 232121. You can also access a recording of our recent webinar on the above subject here.