The changes to off-payroll working rules in the private sector, known as IR35, will go ahead as of 6th April 2021. As most of you will know, this was set to be introduced in April 2020, but delayed as a result of the Covid-19 pandemic. It’s set to be the single biggest change to employment tax for decades. In this guide, we discuss:
- What is IR35
- Why changes are being made
- Who is impacted
- How IR35 is changing
- Who is responsible for tax and NIC payments
What is IR35
We’re pretty sure you’re all aware of this legislation by now, but it’s certainly worth a recap. Essentially, IR35 is two sets of tax legislation, designed to overcome tax avoidance by workers as well as the firms hiring them, who are supplying their services to clients via an intermediary, for example a Limited Company. If this intermediary company were not to be used, they would be deemed an employee.
If discovered, these workers would have to pay National Insurance Contributions and Income Tax, as if they were employed. Therefore, the financial impact is extremely significant and can cost the contractor thousands.
The government is replacing the original IR35 legislation with the new Off Payroll Tax which was originally intended for the public sector only, but is to now be extended to the private sector. It was introduced to tackle the issue of ‘deemed employment’ and disguised employees.
Who is impacted?
Genuine contractors, consultants and freelancers need not be concerned. Just ensure you fully understand how this legislation works and what it means or could mean to you. Similarly, if your business hires contractors, make sure you familiarise yourself when engaging with such suppliers.
Why are changes being made?
• Increased compliance – To improve compliance from those working for working through PSC’s. At present, the government views that non-compliance is widespread with only 10% of individuals who should be inside IR35, paying the correct tax and National Insurance.
• Ensure fair employment – IR35 ensures those individuals who work as employees but operate through a PSC, are paid as if they were an employee, through a payroll. This ensures fairness and equality in the workplace.
• Alignment of industries and sectors – The government is of the belief that the public sector reforms have been a success and therefore they want to follow this and align the public sector. It is reported that the changes in public sector have seen a staggering £550 million in additional National Insurance and tax payments.
How is IR35 changing?
The plans for reforming IR35 in the private sector are born from HMRC and their concerns over non-compliance.
Under the reforms, responsibility for assessing whether IR35 applies, will move from the contractor/PSC to the end-user. If the end-user determines that IR35 applies, the responsibility for operating PAYE and NICs will move to the “fee payer” – that is, the entity which contracts directly with the PSC. These amends will apply to any payments made on or after 6 April 2021.
The responsibility for determining a worker’s status will be extended to all medium and large organisations in the private sector that meet at least two of the following conditions:
• Annual turnover of more than £10.2 million
• Balance sheet total of more than £5.1 million
• More than 50 employees
If the parent of a group meets these conditions, any subsidiaries will also have to apply the off-payroll working rules.
Smaller organisations in the private sector that do not meet these conditions will not have to determine the employment status of any workers employed through an intermediary. This will remain the responsibility of the worker’s intermediary, together with any associated payroll obligations.
The new rules will only apply to services carried out from 6 April 2021 onwards. Businesses should take reasonable care to ensure that they have appropriate processes in place to deal with determining employment status, responding to changes in employment status for tax purposes, and handling appeals.
HMRC has confirmed that businesses will not have to pay penalties for errors in the first year, except in cases of deliberate non-compliance.
HMRC predicts that, as a result of these reforms, IR35 compliance will become easier to enforce. It is also predicted that end-users will take a more compliant approach to IR35 assessments and will be more likely to conclude that contractors are in scope, resulting in increased tax and NICs.
The HMRC tool (CEST) for determining a contractor’s IR35 status will be reviewed ahead of April. The process, as it stands, is deemed to be overly complex and not fit for purpose.
Who is responsible for tax and NIC payments?
If a worker is determined to be employed for tax purposes, it is the fee-payer or deemed employer that is responsible for:
• Calculating the deemed direct payment to account for employment taxes and National Insurance contributions (NICs) associated with the contract
• Deducting those taxes and employee NICs from the payment to a worker’s intermediary
• Paying employer NICs
• Reporting to HMRC through Real Time Information the taxes and NICs deducted
• Applying the apprenticeship levy and making any payments necessary
Checklist – Does IR35 apply to the business?
✓If yes, identify workers off-payroll that need an employment status determination
✓ Use HMRC’s Check Employment Status for Tax (CEST) to determine the employment status of each worker
✓ Pass the employment status determination onto whoever provided the worker
✓ If the business is the fee-payer, make arrangements to:
• Deduct tax and National Insurance contributions (NICs)
• Report and pay any tax and NICs (employee and employer) due to HMRC
• Pay the apprenticeship levy