Off-payroll working legislation – better known as IR35 – has long been a contentious topic for contractors and recruiters alike; yet it’s still surprising to find just how few organisations are fully prepared for the upcoming rule changes.
A recent survey from business management firm Sullivan & Stanley found that more than two-thirds of organisations (71%) were unaware of the significance of the IR35 reform – and a further 52% stated that changes to the legislation were ‘contradictory or confusing.’
Fortunately, organisations have been given additional time to prepare themselves for the update following the UK Government’s decision to delay the proposed changes in light of current challenges posed by COVID-19. As it stands, the off-payroll reform is now set to come into effect at the start of the new tax year on 6 April 2021.
At Recann, we’re often asked by clients to help demystify the ins and outs of IR35, which is why we’ve put together this short guide to run through the key points your business needs to know to cover all bases and stay compliant.
So, what is IR35 exactly?
IR35 is a tax law that was introduced 20 years ago to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company.
The law is designed to prevent individuals and contractors from concealing their true employment status through a personal service company (PSC) when they would otherwise be considered as an employee of their client – and therefore due to pay any necessary income tax and National Insurance contributions.
Whether you agree with it or not, the key thing to note is that important aspects of these rules are soon set to change and businesses must understand the implications for both themselves and their workers if they are to steer clear of investigation and potential fines from HMRC.
How are the rules changing?
From 6 April 2021, medium and large-sized companies in the private sector will have additional responsibility when assessing a contracted worker’s employment status.
Right now, it’s down to contractors to determine their own employment status and any subsequent tax and National Insurance payments to HMRC; though once the new changes come into effect it will be the duty of the private sector businesses engaging them to do this. The end-client will be expected to confirm the IR35 status of eligible PSC or agency workers by providing them with a Status Determination Statement (SDS) before any assignment begins.
From HMRC’s perspective, the new update is necessary to help uncover ‘hidden employees’ and prevent contractors from paying less tax through creative accounting and NIC-free dividends. This will bring private-sector legislation in line with the public sector, where it is already the end-client’s responsibility to determine IR35 status of its workers.
Are there any exemptions?
Yes. The new rules only apply to medium or large-sized businesses in the private sector. That means there’s an exemption for private sector clients that are defined as ‘small businesses’ by the Companies Act (2006) and meet the following criteria:
- Annual turnover is no more than £10.2 million
- Balance sheet total is no more than £5.1 million
- No more than 50 employees
If the client in question meets two or more of these criteria then the duty to determine IR35 status for the assignment remains with the contractor and the new rules do not apply.
Any contractors that work through an umbrella company should be exempt from the updated regulations if they’re already paying income tax and NICs through the PAYE system. It’s also unlikely that sole traders will fall inside IR35, though if you have any doubts it’s worth double-checking your tax status against the new rules.
The UK Government has created a dedicated tool – CEST – to help individuals and organisations determine worker tax status; though the jury is very much still out in regard to the accuracy of the tool.
Clients – Your steps to ensure compliance
Every medium to large-sized organisation must refer to the following three key criteria issued by HMRC when determining whether a contractor falls inside IR35 status:
- Personal service and substitution – The ‘right of substitution’ is a key test for self-employment that must be included as a clause within the contract of services. This specifies that the worker has a right to delegate work to another individual where appropriate and is not required to carry out all contracted work themselves.
- Supervision, direction, or control – Does the employer determine what the worker does and how, when, and where they carry out their day-to-day work? If so, this could be cited as evidence that the worker does not have sufficient autonomy to be considered as an off-payroll contractor. There must be a clause within their contract that specifies the employer has no right to exercise any supervision, direction, or control over the worker in this regard.
- Mutuality of obligation – Mutuality of obligation (MOO) refers to any scenario where the employer is obliged to offer work to a contractor, and the contractor is obliged to accept the assignment as part of an ongoing arrangement. This is another primary test that tax investigations and tribunals will scrutinize when determining IR35 status. Best practice is to include a clear end date in the contract of services for any mid or long-term assignment, as well as a clearly defined non-mutuality of obligation clause.
Beyond these three primary criteria, the client must also review the following areas when determining the IR35 status of a worker:
- Financial risk
- Length of engagement
- Method of payment
- Part and parcel/integration
- Intention of parties
- Right to terminate
You can find more information on each of these additional areas by visiting the QDOS website here.
Contractors – Your steps to ensure compliance
For any self-employed worker looking to clarify whether they fall within IR35, the following questions are a good starting point to determine their status and stay compliant with the forthcoming rule changes in April 2021:
What size of organisations do you work with? Remember that IR35 only applies to contractors working with medium to large-sized companies as defined by the Companies Act (2006).
How many clients do you work with? Whereas long periods working for a single client may be indicative of employment, HMRC does concede that this alone is not a conclusive factor. Even so, you must still be able to demonstrate that you have a clear right to take on additional clients on a concurrent basis.
Do you receive any statutory benefits? Self-employed workers are not entitled to receive any payment for time not spent working. Those that receive annual leave or sick pay benefits will be considered as a full employee under IR35.
Have you reviewed your work contracts? The written contract is the first port of call for HMRC in the event of an IR35 investigation. It’s essential to ensure every necessary clause relating to personal service, substitution, control, mutuality of obligation, etc. is included in both existing and new work contracts.
Have you spoken with clients about Status Determination Statements (SDS)? From April 2021, contractors will need to get an SDS from every client they intend to keep working with. It’s a good idea to broach the conversation ahead of time to ensure everyone understands the new requirements before they come into effect.
Please note that these questions are proposed as a starting point rather than an exhaustive list. If you have any further doubts or questions around your personal IR35 liability, it’s a good idea to speak to an IR35 tax specialist as soon as possible, further details below.
Need more expert guidance on IR35?
As a specialist IT recruitment agency, Recann often works with contractors and PSCs who operate on an off-payroll basis. We consider ourselves well-prepared for the latest reform having sought advice from IR35 tax consultants and taken all necessary steps to demonstrate ‘reasonable care’ across our supply chain and stay compliant with the new rules.
If you’re looking for more advice on the upcoming IR35 rule changes or would like to discuss your own tax status as a contractor, feel free to get in touch with Jon Fisher on firstname.lastname@example.org to arrange a quick chat.
You may also consider contacting a tax specialist to discuss your personal situation, stay compliant, and receive professional advice on your best course of action. We recommend the following suppliers:
- QDOS – Qdos specialise in IR35 legislation and have completed over 150,000 status assessments on behalf of contractors, saving them over £35million in tax.
Bauer & Cottrell – Bauer & Cottrell are IR35 tax investigation specialists with over 20 years experience. They also proudly claim to have never lost an IR35 investigation case.
- Kingsbridge – Kingsbridge offers a range of contractor insurance packages in line with the forthcoming IR35 rule changes.