If you are a business that regularly hires contractors (off-payroll workers), or a contractor supplying services to clients in both the public and private sectors through your PSC (i.e. your limited company). Then you might have heard about the upcoming changes to the IR35 regulation. These changes were supposed to take place last year, but due to the Covid19 pandemic, IR35 off-payroll changes have been moved to this April 2021.
IR35 is a complicated piece of legislation for many contractors and businesses, with the government even being criticised for its clarity over IR35 and a recent blunder of leaking its IR35 off-payroll guidance in an online publishing error.
But stick with me! In this article, we'll help you get past the panic and noise and hopefully answer your questions about the changes to IR35 and what you need to know. From when the changes come into play, who's responsible for what, how to determine status and where you can get further information and advice.
Still with me?... ok let's go.
What is IR35?
First introduced back in 2000, IR35 is a law designed to increase the collection of income tax from people who work through an 'intermediary' such as an umbrella or personal services company (PSC). (i.e. a limited company).
If you are a contractor supplying services to an organisation in the public or private sector through your own limited company (PSC) you should consider the upcoming changes to IR35.
Okay, so what's changing?
In a nutshell, the new IR35 changes will be implemented in April 2021 for private sector contractors, transferring the responsibility of assessing whether IR35 will be applicable to any Assignment (or booking, for contractors in the Medical sector) from contractors to medium and large organisations.
This will apply to all payments made on or after the 6th of April 2021, regardless of when the work was carried (e.g. you are a nurse you will be paid x amount on 7th April for work carried on 30th March, IR35 will be applicable to that payment)
The 'end-client' (please note this wouldn’t be your recruitment agency) will be responsible for determining the IR35 employment status of all their off-payroll workers' assignments, whilst the fee-payer (usually a recruitment agency) will be responsible for deducting the relevant tax and National Insurance contributions (NIC) at the source.
Financial implications due to IR35 could be particularly significant for workers as it could reduce total net income by up to 25%, however, a lot of umbrella companies have introduced the “salary sacrifice” method that could decrease this gap by up to 20%.
Right, so how is contractor employment status determined?
End-clients are responsible for creating a 'Status Determination Statement' or “SD”/”SDS” for short, that states if a contractor's role is 'inside' or 'outside' IR35.
While making the determination, the Client should take a lot of details into consideration, such as but not limited to; the control exercised over the contractor, mutuality of obligation, right to substitution, and financial risk(s) involved to ensure the correct outcome of the SDS.
So, what is my responsibility as a hiring business (end-client)?
As the hiring organisation, it is important that you provide the 'Status Determination Statement' which states whether you believe IR35 applies to the contractor's assignment to both the recruitment agency and the contractor, including all reasoning behind it.
Until this statement is provided you will be classed as the fee payer, making you IR35 liable and responsible for deducting the appropriate tax and NIC's from the contractor before paying this to HMRC.
As an end client, how can I determine if IR35 applies to my organisation?
You would need to prepare for the changes if you are:
- A medium or large-sized non-public sector organisation which engages contractors (off-payroll workers) who work through their own intermediary (i.e. limited company)
- If your organisation is a private entity, consider if the "small company exemption" applies to you.
Under section 382 of Companies Act 2006, a company qualifies as “small” if it is part of the private sector, and if two of the following three conditions are met for two consecutive financial years:
- Annual turnover – not more than £10.2 million
- Balance sheet total – not more than £5.1 million
- Number of employees – not more than 50 employees
Where the small company exemption applies, the responsibility and liability for IR35 remain with the Contractor (as it is currently in the private sector), meaning it is business as usual, and no further changes will be needed.
- A public authority – there are additional changes from April 2021
These rules will not apply to small companies that meet two or more of the following conditions:
- No more than 50 employees
- Turnover no more than £10.2 million
- A balance sheet total of no more than £5.1 million
I'm a contractor, what should I do/expect?
- The end-client must contact you in writing (it may be via email) about their decision whether your Assignment(s) after 6th April would fall inside or outside IR35, providing you with an SDS including all details around their decision.
- Where your Assignment falls inside IR35 you would have to be put through an umbrella company, and for relevant Tax/NIC to be deducted at source.
- Where your Assignment falls outside IR35 it would mean business as usual, and you could still be paid via your PSC (limited company).
- It may be the case that you are engaged on Assignments that are inside IR35 and others that are outside IR35. That is not something to worry about, as each SDS’s outcome is dependent on a lot of different factors that may be different for each end-Client.
What happens if the contractor or fee-payer disagrees with an IR35 decision?
If any party, the contractor or fee-payer opposes the IR35 decision, the client has 45 days to respond and must provide reasoning for the decision made. If the end client fails to do this, the IR35 liability will transfer to them and they will then become the fee-payer.
How do companies prepare for the IR35 reform?
- Start by taking a look at your current workforce and identify individuals who are supplying their services through personal service companies, what are their roles?
- Talk to your contractors to see if the off-payroll rules apply to their role.
- Review payroll processes and how these could be applied for workers inside IR35
How do contractors prepare for the IR35 reform?
If you think you may be affected, you should seek a Status Determination Statement from your hiring company. (this would not be the recruitment agency, but the end-Client you supply services to)
Disclaimer: This article is not intended to be relied upon beyond general education for contractors and businesses to improve their understanding of IR35 legislation. We advise seeking professional expertise when assessing contracts or dealing with HRMC enquiries.
Sources to find out more about IR35
Off-payroll working – (IR35) https://www.gov.uk/topic/business-tax/ir35
Preparing for the off-payroll rules (IR35 Reform) https://www.qdoscontractor.com/docs/default-source/resources/white-paper_-preparing-for-ir35-reform-july-2019.pdf?sfvrsn=6
Guidance for Contractors - https://www.taylorhopkinson.com/ir35/#proposed-changes
https://www.contractorweekly.com/ir35/ir35-guide/
Prepare for changes to the off-payroll working rules - https://www.gov.uk/guidance/prepare-for-changes-to-the-off-payroll-working-rules-ir35
Factsheet for contractors- https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/857148/Contractor_factsheet.pdf
HMRC CEST tool - https://www.tax.service.gov.uk/check-employment-status-for-tax/disclaimer