IR35 reforms still creating confusion

Brought to you in partnership with Sonovate, the leading name in professional contracting.

Despite IR35 Reforms taking place 3 years ago confusion still reigns. With Technical Talent at a premium, the ability to dial-up or down your workforce with Contract resources is more important than ever to make the most of emerging opportunities in the marketplace. Despite this Organisations still have some trepidation over bringing onboard the resources that will enable their projects.

I have spent 21 years providing contractors into Engineering and IT markets, so I have pulled together a run-through of Risks and points to think about in a simple article. If you want to discuss any elements I raise here or you would like our assistance resourcing contract personnel please do get in touch.

A Quick Refresh

The government announced in 2018’s Budget that private sector businesses will become responsible for assessing the employment status of the off-payroll (commonly known as IR35) workers they engage.

From 6 April 2021, medium and large private sector businesses will need to decide whether individuals who work through their own company fall inside or outside of IR35.

Where the worker is inside IR35, the business, agency, or the third party paying the worker’s company will need to deduct income tax, employee National Insurance (NI), and pay employer NI.

What is IR35? - The KISS version.

The off-payroll working rules – commonly known as IR35 – is designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company. However the worker would be classed as an employee if an intermediary is not used.

HMRC refers to such workers as ‘disguised employees’ as the worker doesn’t meet HMRC’s definition of self-employment. Therefore, the correct tax and NI isn’t paid correctly.

The rules to counter alleged tax avoidance via the use of ‘personal service companies’ became law in 2000, and remain in place today.

Note: ‘worker(s)’ = freelancer / contractor

IR35 changes and the Public Sector

In April 2017, the responsibility for determining whether a PSC worker is inside or outside of the scope of IR35 legislation was shifted to the hiring organisation. This included liability for tax and national insurance contributions.

Public authorities impacted include:

Government departments and their executive agencies

companies owned or controlled by the public sector

schools and universities

local authorities

NHS

What was the impact?

Proposed IR35 changes in the Private Sector, April 2021

The Government’s objective is to increase compliance in the private sector. But with the rules that have been in place since 2000, to make sure that they operate as intended.

Consequently, the proposed changes to IR35 will impact businesses in the recruitment sector who supply workers operating through intermediaries, such as PSCs, as well as medium and end user clients who use the services of ‘off-payroll’ workers.

Why?

To increase compliance with the existing off-payroll working rules in the private sector

HMRC estimates that only 10% of people working in this way apply the rules properly

The cost of non-compliance in the private sector is growing and is estimated to reach ￡1.2bn a year by 2022

Who is impacted by the IR35 changes:

Recruitment agencies who supply workers operating through intermediaries, such as PSCs

Medium to large businesses who are using the services of ‘off payroll’ workers.

The worker

Key areas of the proposed changes

From 6 April, 2021, the responsibility for assessing whether IR35 applies will shift from the individual to the end client. (If the role is determined to be ‘inside’ IR35, whomever the fee payer is will be responsible for deducting the relevant Tax and NI contributions at source, before paying the Limited Company the Net amount.)

The new rules will only apply to ‘medium and large businesses’. The criteria is expected to be similar to the definition in the Companies Act 2006 which stipulates “the qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements:”

Turnover not more than ￡10.2 million;

Balance sheet not more than ￡5.1 million; and

No more than 50 employees

"This is an important point to note, many clients seeking reassurance on IR35 reform are outside of these reforms based on the above criteria"

Note: The Companies Act definition doesn’t apply to unincorporated businesses. HMRC suggests two options – to apply the reform to “unincorporated entities with 50 or more employees and to entities with turnover exceeding ￡10.2 million” or “to apply the reform only to unincorporated entities that have both 50 or more employees and turnover in excess of ￡10.2 million.” While it falls on clients to know whether they’re a small organisation, questions have been raised around when workers should be told they’re working for one.

The government has announced that small organisations will be exempt from the changes proposed for April 2021. Meaning that workers engaged in contracts with ‘small businesses’ will remain responsible for determining IR35 and not the client. HMRC confirmed in their March 2019 consultation that this will remain the case even if the worker is hired via a recruitment agency.

For workers whose assignments will fall inside IR35, PAYE and NI contributions will need to be deducted at source from their income by the ‘fee payer’ (agency or end client).

The end client is advised to communicate to the worker the IR35 status of their assignment.

Provided that everyone in the supply chain fulfils their responsibilities, the ‘fee payer’ will carry the liability.

IR35 Tax simplified - The over a coffee break version

Inside = contractors should be paying employed levels of tax.

If continuing to use a Limited Company, the Fee Payer will have to deduct Tax & NI before paying the Limited Company the Net amount or the contractor will need to use an Umbrella.

If providing services via an Umbrella, the contractor will be setup on PAYE and employed by the umbrella. Therefore these changes won’t apply.

Outside = contractors can pay themselves a combination of salary and dividends which can be more tax efficient.

In this scenario, the fee payer can continue to pay the Limited Company the Gross payment as before with no changes to taxation.

Determining IR35 status

IR35 decisions are based on but not limited to:

Mutuality of obligation

Personal service

Direction and control from the client

Substitution

Treated as a permanent employee of that organisation

HMRC has developed the Check Employment Status for Tax (CEST) service to help businesses determine whether the off-payroll working rules apply.

‘Inside’ or ‘outside’ IR35 at a glance

Client responsibility

Clients will have to make the IR35 determination on any flexible worker that they engage with from April 2021, or any contracts that are in place before and have an end date beyond 2021.

Reasonable care

Post changes to IR35 in the Public Sector, in April 2017, many public sector bodies applied blanket ‘inside’ decisions. However, this step was deemed to be unnecessary by HMRC, who quickly introduced ‘reasonable care’.

HMRC defines reasonable care as “doing everything you can to make sure the … documents you send to HMRC are accurate”. Additionally it states that it will take “individual circumstances into account when considering whether you’ve taken reasonable care”.

As a result, it’s advisable for clients to have a standardised approach to defining inside or outside IR35 such as the CEST tool.

Umbrella Company Contractors

Anyone supplying services using an Umbrella does not fall into the legislation. This is because they are employed by the Umbrella Company and the relevant Income Tax and NI contributions are paid in the same ways as any traditional employee.

Summary of proposed IR35 changes in the Private Sector

New rules apply to private sector from April 2021

End client is responsible for determining IR35 status

Small clients are excluded from the new rules

End clients have a duty of ‘reasonable care’ when making determination

End client to supply a Status Determination Statement citing reasons for decision

Client Led Status Disagreement process in place, whereby contractor can challenge status. The client has 45 days to respond

If the contractor is inside IR35 then the Fee Payer must deduct Tax and NI payments

So despite the need for professional services like those offered by Hurren and Hope and Sonovate it's a relatively straightforward process to bring onboard contract personnel, with digital timesheets, Self Billing and IR35 Compliant contracts all part of our offering we have a network of trusted contract professionals within Change and PMO, Software Engineering, Support and leadership and Service Management.

Get in touch to discuss your project.