How do the IR35 off-payroll working rules affect businesses in the private sector?/ Following the IR35 off-payroll working rules having hit the private sector are you up to speed on the changes?
What are the IR35 (off-payroll working rule) changes?
IR35 applies to situations where workers supply services to end clients through intermediaries (usually in the form of limited companies known as personal service companies). The intention of IR35 is, and always has been to ensure that the workers income tax and NICs liability in these situations is broadly equivalent to that of an employee.
Originally, IR35 legislation required the intermediary providing the workers services to determine the worker’s status for tax purposes. However, the government put in place a shift in responsibility for tax status determination to the end client, in the hope of improving compliance. The effect of the off-payroll IR35 regime therefore, is to place the obligation to make deductions in respect of income tax and NICs onto the party that is closest in the relevant contractual chain to the personal service company, whether that party is the end client which contracts directly with the personal service company or another intervening intermediary in more complicated contractual arrangements.
This legislative change was first applied to public sector end clients in April 2017.
Since 6 April 2021, medium and large private sector entities who have a UK connection are also subject to the off-payroll rules and determining whether IR35 applies.
‘It doesn’t impact me’
The off-payroll IR35 regime applies to engagements under which:
- An individual personally performs (or is obligated to personally perform) services for an end client;
- The services are not provided pursuant to a direct contract between the individual and the end client, but under arrangements involving a third party;
- The end client is either a public authority or a medium or large private sector entity that has a UK connection;
- The circumstances are such that if the services were provided under a direct contract between the individual and the end client, the individual would be regarded as an employee or office holder of the end client for income and/or NICs purposes, and
- The intermediary (which is usually a company, but may also be a partnership or another individual) meets certain conditions.
There is an exemption for small companies. A company will always be small in its first financial year. Thereafter, a small company (which, for the off-payroll IR35 rules includes LLPs, unregistered companies and overseas companies) will need to satisfy at least 2 of the following 3 requirements:
- number of employees is not more than 50;
- balance sheet total is not more than £5.1m, or
- annual turnover is not more than £10.2m.
Companies within a corporate group, or a joint venture company must consider if the respective parent company and controlling joint venture entities are also small in order to attract the exemption. For unincorporated entities, turnover alone is determinative.
Companies will need to actively monitor their size in order to ensure compliance with the off-payroll IR35 regime. A company will cease to be small only if it fails to meet 2 of the 3 requirements set out above for 2 consecutive years. Furthermore, workers and any entity the client contracts with, have the right to request confirmation from the client as to whether it believes it qualifies as ‘small’ for a specific tax year.
‘But this is just a tax issue’
Unfortunately not. Whilst, where the off-payroll IR35 regime applies, it operates for income tax and NICs purposes only, the changes also pose significant employment law risks. A key element of the off-payroll IR35 regime is the ‘notional’ or ‘hypothetical’ contract between the end client and the worker and whether this amounts to a contract of employment or the holding of an office with the end client.
Take, for example, a situation where an organisation assesses a consultant as employed where nothing has changed and that organisation has engaged that consultant on a self-employed basis for a number of years. This outcome could allow the consultant to potentially pursue backdated claims for employment benefits.
It is therefore critical that employment law risks are managed as part of any assessment.
‘I can use CEST to determine status’
CEST is HMRC’s online employment status checker. It is an online questionnaire. CEST has been widely criticised for giving an ‘employed’ result in the vast majority of situations (despite tax tribunal rulings on identical fact patterns to the contrary).
HMRC has agreed to stand behind a CEST result, provided, of course, that they agree with how the questionnaire has been completed. Further, in a recent case, HMRC sought to resile from a CEST result. So, while CEST can be used this needs to be approached with caution.
The Status Determination Statement (“SDS”)
If the off-payroll IR35 regime applies, from 6th April 2021 the end client is responsible for providing the worker with a status determination statement. Notably unless and until an end client provides an SDS, the end client itself will be treated as having made the deemed direct payment and is therefore the entity responsible for operating PAYE and accounting for NICs.
Where a worker (or deemed employer) receives an SDS from an end client and disagrees with the conclusion, the worker can make representations to the end client that the SDS is incorrect.
What are the consequences of non-compliance?
Should an end client become liable to operate PAYE and account for income tax and NICs in respect of engagements it has with an individual’s intermediary it will remain primarily liable for such income tax and NICs in the event that it fails to comply with the IR35 obligations. In addition, the end client will be liable for interest and associated penalties for such non-compliance.
How can Rumm Employment help your business manage these changes?
We have specific experience in this niche area and can assist you from determination of the rules to implementation and any considerations that may arise in between, to include:
- Considering the applicability of the off-payroll rules to your workforce;
- Developing a business strategy for dealing with the off-payroll rules including the consideration of any employment law exposure;
- Developing the required standard documentation, including relevant polices and procedures, and the Status Determination Statement;
- Reviewing off-payroll worker contracts/agency/ and employment business contracts;
- Managing communications with contractors including concerning any status disputes;
- Managing implementation and continued review of the off-payroll rules.
Please contact David Rumm on either 07899 865909 or email@example.com or any of our team for an initial discussion and/or for more detailed advice.