IR35 Changes: What you need to know
Reforms to the rules on off-payroll working (known as IR35 or the Intermediaries Legislation) are due to be extended to medium and large private-sector organisations from 6 April 2021. The extension to the private sector was due to go ahead in April 2020 but was put back a year due to the Covid-19 pandemic.
The IR35 rules were brought into the UK in 2000 to ensure that individuals working like employees but operating through a personal service company or, intermediary company pay broadly the same tax and national insurance as an employee would. The rules, however, have been largely ineffective with HMRC not receiving as much tax revenue as expected because the responsibility for assessing whether the rules apply has been with the personal service (or, intermediary) company.
The new reforms will see a shift in responsibility for assessing whether IR35 applies to the end-user who will now have to determine whether an individual who is engaged through a personal service or, intermediary company would, if they were directly engaged by them be an employee. If the end-user decides that they would have been their employee, then it is the organisation in the supply chain which actually pays the personal service company/intermediary who is deemed to be the ‘employer’ and responsible for paying the individual as if they were an employee.
The reforms will apply to any payments made on or after 6 April 2021, unless all the contractor’s labour was provided before that date.
This is a significant change and businesses who engage contractors need to be aware of the rule changes not least because there are three positive actions which need to be demonstrated where such a relationship is identified.
Status Determination Statement
Under the new rules, the client engaging the individual must provide a ‘Status Determination Statement’ directly to the individual and to the party the client has contracted with. The statement is an assessment of the employment and tax statuses and will be passed through the supply chain. HMRC have introduced an online checking service (the CEST tool) which it encourages businesses to use when making a status determination.
Need for a Dispute Resolution Process
Organisations will need to have in place a dispute process to deal with complaints from individuals who disagree with the decision that their engagement falls within IR35. If the contractor or the ‘deemed employer’ challenges the status determination as being incorrect, the client must consider their representations and reply within 45 days, either stating that it has concluded that the status determination is correct or providing a revised status determination.
Extended liability for failure to pay tax
Businesses need to be aware that if another party in the supply chain fails to pay the tax and national insurance required under the IR35 rules, the end-user client could ultimately be liable for this. This measure encourages proper due diligence throughout the entire supply chain and should serve as a reminder of HMRC’s authority. If HMRC is unable to recover the unpaid amounts from the party that has failed to meet its obligations, it will try to collect from the first agency in the supply chain. If this is not successful, liability will ultimately fall with the end-user client.
Author: Charlotte Geesin, Head of Employment Law & Business Immigration at Howarths