If you are a business hiring contractors or you are self-employed yourself, you will have heard about off-payroll working, also known as IR35. It's essential for contractors, recruiters, and employers to understand the rules as new changes come into effect in April 2021.
Below, Caroline Vooght, a director at recruitment specialists Expion Search & Selection focuses on the ten things you need to know about IR35 and the changes to come.
What is IR35?
The IR35 rules were introduced to assess whether a contractor is genuine rather than a 'disguised' employee to ensure they pay the correct amount of tax. In the past, the contractor determined this; however, under the new IR35 rules set to come into place in 2021, the employer will become accountable for all IR35 judgements.
As businesses increase their use of interim contractors while navigating the impact that Covid has brought, it has never been more vital for organisations to understand the implications IR35 can have on finances.
When does IR35 apply?
IR35 tends to apply when the following conditions are met:
The individual performs services for a client.
The work is provided under a contract involving an intermediary.
The services are provided under an agreement between the client and contractor, meaning the contractor is classed as an employee.
Who will be responsible for IR35 decisions?
Under the new IR35 rules, the employer (referred in the law as the ‘end client’) will be made accountable for any IR35 judgements. Previously, this determination was left to the contractor to decide. Now it is up to the end-client to choose using reasonable care and share this, in addition to any reasoning behind the decision, to all parties in the supply chain.
End-clients must take 'reasonable care' when making a status determination decision. HMRC has stated blanket decisions (i.e. that an entire workforce is caught by the off-payroll rules) does not constitute 'reasonable care' – and is of bad practice
What is the Status Determination Statement?
A status determination statement (SDS) is a comprehensive statement from the end-client which declares a contractor's deemed employment status following an IR35 assessment, detailing reasons for reaching this conclusion.
According to the new rules, all clients must demonstrate that they have assessed IR35 correctly but may be expected to take a higher degree of care by larger companies that have more significant resources to contribute to compliance. Should the client fail to provide 'reasonable care', they will inherit liability, whether they are the relevant 'fee payer'.
What's considered in an IR35 decision?
IR35 will affect contractors who work in the same way as an employee of their end client but get paid via an intermediary – (i.e. their own limited company). Determinations are dependent on several criteria, including control, The Right of Substitution and Mutuality of Obligation.
Control is determined on whether a contractor has the freedom to carry out the contract, using their expertise, as they see fit.
The Right of Substitution is the right for a contractor to send a replacement to perform services for the client on their behalf. Employers are not allowed to interview the replacement contractor and must accept the choice of the contractor.
Mutuality of Obligation states the contractor mustn't do any other work for the business, and the company is not obliged to provide additional work outside the contract, nor on completion; this constitutes a contract of employment.
If the contractor is in charge of how their contract is completed, work according to their own schedule, allow a substitute contractor, and are prohibited from working with different businesses; this will leave them outside IR35.
What is a ‘blanket approach’ and ‘reasonable care’?
Problematically, some organisations have decided to adopt a 'blanket approach' covering their entire company against the tax liabilities and national insurance costs. This doesn't mean HR departments are deliberately providing inaccurate information but suggests there may be misunderstandings of how contractors operate.
HMRC has stated the blanket approach does not constitute 'reasonable care', and is bad practice. According to the new rules, all companies must demonstrate that they have assessed IR35 correctly and may be expected to take a higher degree of care if they are a larger company that has significant resources to contribute to compliance.
Who's affected by the IR35 changes? And How?
Firstly, the legislation applies to medium and large businesses. If you are classed as a small business with less than 50 employees, typically under £10m turnovers, these changes don't apply.
The changes in IR35 will not necessarily affect the self-employed, sole traders and umbrella companies. HMRC decided that instead of the contractor, the end-client will determine their IR35 status with the fee-payer picking up the IR35 liability. This means some umbrella companies will be affected if they manage the accounts for contractors and pay them as a PSC. You may be affected by IR35 if you are:
- a worker who provides their services through their intermediary
- a client who receives services from a worker through their intermediary
- an agency providing workers' services through their intermediary
Will IR35 changes continue to go ahead?
This is the most frequently asked question, and our answer is yes, we believe so. The changes made to the off-payroll rules were due to come into effect on 6 April 2020. This has since been delayed until April 2021 to help businesses deal with the economic impact of COVID-19.
The delay is not a sign of cancellation with the changes being made law in July 2020. This means that HMRC would have to apply to challenge the law for the changes to be cancelled.
What happens if my contract runs post-April 2021?
You should proceed ahead as though the legislation is already in place and undertake a full status determination statement. To do so, you need to make sure suitably qualified people carry out the SDS within the client business. The role and activities taking place must be thoroughly interrogated to make sure the answers given are answered correctly and in full as this is key criteria for HMRC. The status determination must be communicated throughout the recruitment supply chain.
What to do next?
Working with a recruitment agency can remove the risk of an HMRC challenge by assessing the status of the contractor based on the assignment, and if deemed to be outside IR35, provides insurance that covers the tax liability should there ever be a challenge from HMRC. This removes the risk to everyone in the supply chain, and would therefore give you immediate access to contractors if you need them.