IR35 isn’t new: it’s been around since 2000 and contractors know the impact an inside IR35 determination will have. Since the controversial public sector reforms shook the industry in 2017, things have been relatively quiet. But that was until the announcement that the off-payroll working reforms will be rolled out to the private sector.
If you’re currently working through your own limited company and you’re wondering just what these changes ahead could mean for your business, our guide is here to help.
What is IR35?
IR35 is tax avoidance legislation which poses the hypothetical question; in the absence of the intermediary (limited company) would the underlying relationship be one of employment? Put simply, the government feels it is unfair that two people performing the role in the same way will pay different amounts of tax. You can find out more in our guide to IR35.
IR35 in the private sector: what’s changing?
In April 2017, the off-payroll working rules were implemented in the public sector which meant that the responsibility for determining IR35 status of an assignment shifted from the contractor to the engager or the end hirer. Under these rules, if the contract is deemed to be inside IR35, the ‘fee payer’ is responsible for deducting National Insurance and PAYE income tax from the contractor’s pay and for paying employer’s National Insurance contributions.
In the 2018 Budget, the Chancellor announced that the off-payroll rules would extend to the private sector for medium and large sized businesses. As with the public sector reforms, in businesses where the contract falls inside IR35, the fee payer (this will usually be the agency or the end client) will be responsible for deducting tax and National Insurance contributions.
The off-payroll working reforms were initially intended to take effect on 6th April 2020, however, they have been deferred until 6th April 2021 in response to the COVID-19 crisis.
Who will be affected by the IR35 private sector reforms?
HMRC announced in their policy paper that they expect 3 groups of people to be impacted by the IR35 reforms:
- Individuals supplying their services through an intermediary, such as a personal service company (PSC), and who would be employed if engaged directly.
- Medium and large-sized organisations outside the public sector that engage with individuals through PSCs. Public sector organisations will also be affected by changes to improve the operation of the reform.
- Recruitment agencies and other intermediaries supplying staff through PSCs.
Unlike the public sector reforms, there is set to be an exemption for small companies in the private sector:
The small company exemption
If a company meets the criteria for a small company, they will not be impacted by the reforms. The contractor will continue to assess the IR35 status of their assignment and carry the liability.
A small company is defined as one which has two or more of the following requirements by Companies House:
- A turnover of less than £10.2 million
- A balance sheet total of less than £6.1 million
- Less than 50 employees
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Who is responsible for determining IR35 status in the private sector?
Following the reforms, where the engagement with a medium or large end hirer, the responsibility for determining the IR35 status off an assignment will fall to the end hirer, regardless of how many parties there are in the supply chain. The end hirer will need to prove that they have used reasonable care to arrive at their decision and must issue a Status Determination Statement to the contractor and the next agency in the supply chain.
Status Determination Statements
From April 2021, hiring organisations will be required to provide a statement to the contractor and the next party in the supply chain (usually a recruitment agency). This statement must state the IR35 status of the assignment and the reasoning behind it.
If the first agency in the supply chain is not the fee-payer, they must pass this down the supply chain until it reaches the fee-payer. If this is not passed down the supply chain the fee payer responsibilities will sit with the last party in the supply chain to receive the SDS, meaning the liability for any unpaid taxes will rest with them.
What if the end hirer fails to show reasonable care?
One of the impacts of the public sector reforms was end hirers blanket assessing their contractors as inside IR35 as a way to mitigate their own liability, should they be investigated by HMRC. In a bid to avoid this, HMRC included in the reforms a requirement to take reasonable care when assessing the IR35 status of the assignment, they have been clear that blanket assessments do not constitute reasonable care. If the end hirer fails to take reasonable care, the SDS will be invalid and the end hirer will retain the responsibility for any unpaid tax liability.
Client-led disagreement process
If you have been issued with a Status Determination Statement and you disagree with the decision made by your end hirer, the client-led disagreement process means that you have the right to dispute their decision. The contractor or the fee-payer can make written representations to the end hirer and it would be sensible to include an independent assessment of the contract in this response. They have 45 days to respond with a revised SDS or an explanation of why they will not be revising this. If they fail to respond within the time frame, they will assume the tax liability.
How is IR35 status determined?
There are a number of factors to consider when assessing the IR35 status of a contract. The key areas are:
Supervision, direction and control: This covers how much control a contractor has over what, when and how they complete work. If the client or hirer has the right to control the contractor and tell them how to complete the work, this would point to the assignment being inside IR35.
Right of substitution: If the contractor could send someone else to complete their work in the event that they are unable to, and if this clause is outlined in the contract, this is an indication that the contract will fall IR35.
Mutuality of obligation: Mutuality of obligation refers to whether the contractor is obligated to take work offered to them and the hirer is obligated to keep providing it as is seen in employment relationships. An absence of MoO would point to a position outside IR35.
There are other factors to consider, for example, the degree of financial risk and ‘in business factors’ and it is important to note that IR35 is not a tick box exercise: a holistic view of the working relationship is needed.
Using HMRC’s Check Employment Status for Tax (CEST) service
When the public sector reforms were rolled out in 2017, HMRC launched a tool to help public sector organisations to assess the IR35 status of an assignment. This much maligned tool has been revised several times with limited success, and there are still question marks surrounding the accuracy of the status assessments. The tool still fails to take into account Mutuality of Obligation (MoO), one of the key determining factors of employment status and in around 80-85% of cases, it is unable to arrive at a determination.
Removal of the 5% allowance
Currently, when working in the private sector, there is a 5% allowance for PSCs working inside IR35 to account for administrative costs. However, this is to be removed with the private sector reforms.
How can I protect my IR35 status?
The best way of protecting your IR35 status is to undertake a comprehensive contract review. During this review, an expert will assess your working conditions and your contract to make an informed decision about how likely it is that your contract will fall inside or outside of IR35. Depending on this decision, they will be able to offer advice to help you restructure your working practices and reduce the chances of falling inside.
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