In October 2018 the government confirmed that it would be extending the off-payroll rules to the private sector.
As of 6 April 2021, clients in the private sector are now responsible for assessing the IR35 Status of their contractors. For those deemed to be working inside IR35, the client is now required to ensure they deduct all tax and National Insurance contributions due. The draft legislation was published during on July 2019.
Who is affected by IR35 legislation?
The off-payroll working rules were introduced in 2000 due to the government’s perception that an increasing number of employers and contractors were contravening compliance through what they termed ‘disguised employment’. The new legislation meant that contractors would need to assess their own employment status, and ensure that their tax and National Insurance Contributions (NICs) deductions were in alignment with their self-assessed status.
In April 2017, the legislation governing the public sector changed, placing the onus on the client to assess the status of contractors working for them through an intermediary (which is usually the contractor’s own personal services company). This moved liability for appropriate tax and NIC deductions from the contractor to the client.
In April 2021, the government made further changes to IR35 rules by extending the legislation to the private sector, making end clients responsible for assessing the employment status of their contractors. The changes also make private sector clients responsible for making the correct deductions for the tax and NIC of their contractors who are assessed to fall within IR35.
The changes only affect medium-to-large private sector employers. Small employers are exempt from the new legislation, and it remains the responsibility of their contractors to assess their own IR35 statuses. As per the Companies Act 2006, two of the following three criteria must be met in a particular year in order for a company to be classified as ‘small’:
- The company’s turnover must not be more than £10.2m
- The company’s balance sheet must not be more than £5.1m
- The company must have fewer than 50 employees.
Medium-to-large employers may pass responsibility for IR35 assessment from themselves to the fee-payer, if a fee-payer is involved in the supply chain.
Regardless of whether the client or the fee-payer assumes responsibility for the IR35 determination, the new legislation states that the decision must be cascaded throughout the supply chain so that all parties are aware of their obligations.
How is IR35 status determined?
HMRC has created a tool called ‘Check Employment Status for Tax’ (CEST). Employers are advised to answer the questions the tool presents to assess their contractors’ IR35 status. Below are some examples of the kinds of questions presented by the tool. This is not a comprehensive list, but an indication of what may be asked:
- Who is completing the tool? This might be the worker (contractor), the end client, or the employment business paying the worker
- What type of intermediary does the contractor work through? (personal services company, partnership, or sole trader?)
- Can the contractor send a substitute to work in their place?
- Is the contractor required to pay the substitute, or would the employment business pay them?
- How much supervision, direction, or control will the end client exert over the contractor?
- Has the contractor had to pay for any materials in order to provide their services?
- Has the contractor been integrated into the client workforce?
It is not mandatory for employers to use CEST to determine the IR35 status of their contractors, but HMRC have said they will stand by the results given by the tool, unless any checks reveal that inaccurate information has been submitted.
IR35 determination disagreements
Clients are responsible for developing their own internal systems to handle any disagreements between themselves and their contractors regarding IR35 status determination. The government has set out the minimum requirements for these internal systems in the new legislation.
Preparing for changes to IR35
Employers are advised to assess their business to see whether they qualify as a ‘small’ company. If they do not, they should assess how many contractors they currently engage with and review their contracts for details about the nature of their current engagements. Employers should then use CEST, or another means, to assess whether their contractors will be inside or outside IR35..
Employment businesses are advised to makes sure their clients are aware of the changes, and encourage them to assess their workforce. A strategy should be developed between the employment business and their clients to work out how clients should manage any increased costs introduced by the changes to IR35 rules. Process and software changes to account for new IR35 working practices should also form part of the strategy.
Do you engage contractors?
If you engage contractors through personal service companies (ltd co) and have undertaken your assessment as to whether or not they are inside or outside IR35 and found that they are “in”, you may well be looking for an alternative legally compliant way to engage these workers. This is where CK Group can help.
We offer a scalable payroll solution for contractors from a single person through to teams into the hundreds. We have a track record of compliance and a high level of customer service. We can engage these workers on your behalf and offer them a PAYE contract and a simplified single monthly invoice for the service.
Speak to CK about how we can transfer your workers and save you money in the process.
To find out more contact Liam O Connell of the CK Group on 01246 457706, or email him at loconnell@ckgroup.co.uk