Are you aware of the far-reaching changes to the off-payroll working rules from 6 April 2021?
What is IR35?
- At its simplest, IR35 is an anti-avoidance scheme for tax.
- Example: Joe Bloggs provides services to a business, ABC Limited. However, ABC Limited's contract for the services is with Joe's personal services company – J.Bloggs Limited. ABC Limited pays J.Bloggs Limited a fee for the services. Joe receives a salary from J.Bloggs Limited and takes further payment in dividends. However, if Joe would, in reality, be classified as an employee of ABC Limited if J.Bloggs Limited was ignored (i.e. when assessing the relationship between ABC Limited and Joe), IR35 kicks in and requires that Joe Bloggs be taxed as an employee of ABC Limited.
- The IR35 rules (or, “off-payroll” rules) therefore stop the avoidance of income tax and National Insurance contributions – which contractors often achieved by inserting an intermediary (J.Bloggs Limited) between the “client” (ABC Limited) and the “contractor” (Joe Bloggs).
What is changing?
- At present, it is J.Bloggs Limited's responsibility to determine whether the IR35 rules apply to the service provision to ABC Limited.
- However, the burden of determining employment status for IR35 purposes is shifting from the intermediary to the “end-user client” – ABC Limited, in the scenario above.
- The change comes into force from 6 April 2021 (delayed from its original date of 6 April 2020 due to the pandemic). There haven't been any indications of a further delay as yet.
- Ultimately, this means the liability for “getting it wrong” – i.e. incorrectly determining that an individual is not caught by IR35 – will fall on the end-user client, who may be pursued by HMRC for failing to comply with its income tax and National Insurance contributions obligations.
Will it apply to me?
- The change will affect all “medium or large” end-user clients in the private sector (the rules already apply in respect of public sector organisations). “Small” end-user clients in the private sector will not be caught by the rule change, meaning the intermediary will continue to bear the responsibility of determining IR35 status.
- An end-user client is “medium or large” if it satisfies two or more of the following criteria:
- its annual turnover is more than £10.2 million;
- its balance sheet total is more than £5.1 million;
- it has 50 or more employees.
- Group companies: a group's size is determined by the size of its parent company, meaning that if the parent company is classed as a medium or large entity, every member of its group will be too. A parent company's size is determined by aggregating the figures from all members of the group, wherever they are incorporated in the world.
The changes apply to my organisation: what do I need to do now?
- If the changes apply, you should audit your workforce. For each worker you identify as providing services to your organisation through an intermediary, you need to determine their status.
- The key question to ask is this: If the services were provided under a contract directly between you and the individual worker, would the worker be regarded as your employee?
- In answering this question, the contract that you have in place is the starting point. However, a court can look behind the contract – at what happens in practice – when determining status. This principle was confirmed in the recent Supreme Court decision relating to Uber. Key factors include:
- Mutuality of obligation – if the worker is required to accept work offered by your organisation and/or your organisation is required to offer work to the individual, this points towards deemed employment.
- Control – if your organisation decides matters such as what the worker does and when, or where and how they do it, this points towards deemed employment.
- The right to provide a substitute – if the worker is required to perform the work personally and cannot send a substitute in their place, this points towards deemed employment.
- The government has created a ‘Check Employment Status for Tax' tool. However, it is often ambiguous in its outcome, issuing “undetermined” results – therefore further advice may be required.
- Once you have made your assessment, you must provide each relevant worker with a “Status Determination Statement” (SDS), and give them a right to challenge that statement (with a clear procedure for doing so).
We have people who provide services, but we don't have any contracts with “personal service companies” – does this mean we don't need to do anything?
- Not necessarily. Matters become more complicated when there are further corporate entities within the contractual chain, such as an “employment business” (often referred to as an “agency”). It is important that you determine whether individuals who the employment business sends to you are engaged via their own intermediaries – requiring you to carry out some due diligence on your contractual relationships. If they are, your organisation will still be responsible as the “end client” for making the determination and providing the SDS to the individual. A copy of the SDS must also be provided to the agency.
- Some service providers may be providing you with a “fully outsourced” service, in contrast with organisations who supplying you with labour only. However, the relationship with such service providers should still be examined carefully, as the question as to whether a service is fully outsourced or not is a fact sensitive one.
- In addition, whilst a determination of deemed employment for IR35 purposes relates to the tax position, the factors described above are also relevant to any determination for employment status purposes. This is therefore an appropriate time to complete an audit for all “off-payroll” workers, including self-employed individuals and individuals engaged through other third parties such as an employment business (regardless of whether or not they are caught by the IR35 rules), so that you know exactly who you have working for your business and can consider whether any individuals should properly be engaged as employees.
HMRC published a briefing on 15 February 2021 regarding the approach it intends to take in respect of enforcing compliance with the rules. While the briefing confirms that HMRC will support businesses to comply where innocent mistakes have been made, it confirms that a dim view of wilful non-compliance will be taken – including the possibility of fines and publishing the business' name on a public “deliberate defaulters” list.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.