IR35 Tax Legislation Change - Apr 2021

IR35 changes were postponed for one year from April 2020 and the Government have now confirmed that the legislation will come into effect in April 2021.

The reforms govern the tax treatment of workers who utilise a Personal Service Company (PSC) to supply their services.

IR35 (also known as the ‘off-payroll rules’ or the ‘Intermediaries Legislation’) is a tax regime affecting contractors, which is designed to make sure everyone that does the same job in the same manner pays similar income tax and national insurance.

Where a contractor’s assignment is assessed to be ‘inside of IR35’ (which means that the contractor’s working arrangements have similar key features to that of an employee), income tax and national insurance must be deducted from the contractor’s pay.

Currently, in the private sector, it is the contractor’s personal service company which is responsible for assessing whether the contractor is inside or outside of IR35 and to make the required tax deductions.

The Government’s view is that a significant percentage of contractors are not assessing and paying tax correctly, which is the main reason for these reforms.

IR35 latest: your obligations as a hirer

The following is a simple breakdown of what you need to have in place:

1. You need to confirm whether the changes in legislation apply to your organisation, some smaller firms may not be impacted.
2. You will need a mechanism for assessing the status of each individual role that you use contractors for, on each individual assignment an individual undertakes in order to determine whether it falls ‘inside’ IR35, e.g. the relationship is equivalent to them being an employee.
3. You will need to provide a status determination to the party you contract with prior to the work starting, it would also be useful to be able to indicate whether work is inside or outside when a role is advertised as this may have a strong impact on the attractiveness of the opportunity.
4. Any contractor impacted by a status determination has a legal right to request the reasons behind the determination and to challenge them, even if they are not contracted directly with you. This is referred to as an ‘appeals process’ which you must be able to support.
5. Where the determination finds a role to be inside IR35 or where the hirer does not provide a determination or the reasons for its determination post an appeal, they become liable for any unpaid income tax and NICs due by the contractor.

Contracting under IR35

Contractors deemed to be inside IR35 are likely to be dismayed at the prospect of paying a larger percentage of their earnings in tax and may well push for increased rates of pay or look for an alternative assignment elsewhere.

As their employer, you are not obligated to pay them anything additional; however, you will want to engage with all of your existing contractors and understand how they are likely to respond.

In addition to the above, you will need to have a mechanism in place for ensuring that the contractors deemed to fall inside IR35 are paying the correct levels of tax and NIC. This will probably require you to recontract in a different way with existing contractors, potentially via a new third party such as an umbrella firm. This will require a considerable administrative effort prior to the new legislation coming into force as well as an additional ongoing audit requirement to ensure that umbrella firms are operating correctly.

The risks to you as a hirer

The changes to IR35 legislation and the experiences of both the public sector and early adopters in the private sector highlight numerous risks that all hiring organisations must face. Failure to act could result in significant consequences including:

• Significant tax bills from HMRC
• Liability for taxes being passed up the supply chain
• The burden of dealing with determination appeals
• Fines/penalties for non-compliance
• Reputational damage for non-compliance
• Negative perspective amongst the contractor community
• Skills shortages and disruption to projects and operational performance

If you have any questions regarding the IR35 changes, our consultants will be happy to answer them and guide you on any uncertainties you may be faced with.