The IR35 ‘off-payroll’ rules will be extended to the private sector on 6th April 2021, directly affecting a large number of contractors. What exactly does this mean, and what should contractors and clients do to comply with the new legislation?
The April 2020 Off-Payroll rules were delayed until April 2021 – following an announcement made by Steve Barclay MP in the House of Commons on 17th March 2020 – Read More Here.
What are the off-payroll (IR35) rules?
The Intermediaries Legislation – IR35 – has been around since 2000; its core aim is to remove the tax advantages of providing services via a limited company by individuals who are not truly in business on their own account. In other words, the rules are aimed at so-called ‘disguised employees’ – people whose working practices are more akin to those of traditional employees.
Under IR35 (Chapter 8 of ITEPA 2003), the intermediary (the contractor’s limited company) is responsible for determining the employment status of its workers.
Due to perceived widespread non-compliance with IR35, in 2017 the Government rolled out ‘off-payroll working’ rules to cover all public sector organisations. Under these new rules (Chapter 10 of ITEPA 2003), the end-client is responsible for determining the employment status of contractors.
At the 2018 Budget, the Chancellor announced that the rules will be extended to most private sector businesses from April 2020. Only ‘small business’ clients will be excluded. You can access the Budget 2018 brief here (PDF).
Under the off-payroll rules, if the end-client deems you to be ‘inside IR35’, the fee-payer in the contractual chain (often a recruitment agency, or client) is responsible for deducting income tax and National Insurance Contributions from the contractor’s fee.
The Treasury expects this new measure to net £1.3bn per year by 2023.
How does a client determine my IR35 status?
Under the new off-payroll rules, the end-client will determine whether or not your contract falls inside IR35 or not. However, given the recruitment agency will often carry the liability, they will often be heavily involved as well.
Following their assessment, usually looking at your contract terms and working practices, the end-client must issue a Status Determination Statement (SDS).
The SDS outlines the end-client’s IR35 status decision and must be provided to both the contractor and the party directly engaged with the client (often the agent). Until this is provided, then the end-client will remain responsible for collecting income tax and NICs.
The client is obliged to take reasonable care when making this assessment, however, we have seen from both the public sector rollout and behaviour preceding the private sector rollout, that many larger clients are simply opting to not use PSC contractors altogether, or making ‘blanket’ inside-IR35 determinations for entire groups of contractors.
While blanket inside-IR35 determinations are not compliant and lack reasonable care, role-based assessments – where contractors with identical terms and conditions – are compliant, albeit ill-advised by IR35 experts when not used for solely indicative purposes.
If you don’t agree with an IR35 status decision, there is a new client-led disagreement process, which obliges the end-client to review a decision and provide a reasoned response within 45 days. If they fail to do this, then the client (not the agent) will assume the IR35 liability.
Experts have raised concerns about this process, because it isn’t independent, with the end-client effectively holding all the cards. If they maintain their original IR35 decision is accurate, it can become difficult for contractors to successfully challenge and overturn it.
What employment status tools are available to clients?
There is an official online status tool, CEST. HMRC has stated that if the tool finds that a contractor is ‘outside IR35’, it will stick by this determination, assuming you have provided accurate information.
However, as highlighted in a case involving The NHS last year, HMRC will only stand by a result provided by CEST if the information inputted is deemed correct.
Unfortunately, CEST has been widely condemned for ignoring key parts of case law – particularly excluding an important historical employment status factor – the Mutuality of Obligation.
Several commercial providers also offer a wide range of IR35-related support to clients – including IR35 contract reviews, and insurance.
What happens if I’m caught by the off-payroll changes?
If your client deems your contract to be outside IR35, then life carries on as normal – you operate via your limited company and pay tax in the same way as any other small company.
If, however, your work is found to be inside IR35, the ‘fee-payer’ (the party closest to your limited company in the chain) is responsible for paying employers’ NICs, and deducting employees’ NICs and income tax from your invoice for services provided, and paying these liabilities to HMRC.
If you are VAT registered, the VAT element is excluded from the tax calculation before being added back on for payment to your limited company.
In most cases, however, clients and agencies encourage, and in some cases require, the use of alternative working methods such as umbrella companies in order to avoid the complicated payroll processes.
What are my trading options under the new rules?
Your choices of trading structure are limited by the actions of your end-client, who may decide to no longer engage limited company contractors at all. Or if they do, you may be found to be inside IR35.
Here are your options:
Trade via your limited company
If you are not determined to be inside-IR35, you can trade as usual. If you are, your ‘deemed employer’ (the ‘fee-payer’) will deduct all taxes, and pay you a deemed income, which you can withdraw from your company account.
Trade via an umbrella company
If you are determined to be inside-IR35, it may be more suitable for a reputable PAYE umbrella company to act as the intermediary between you and the client (rather than your own limited company). You will be taxed as an employee, however, the employers’ NICs must be paid by the umbrella company, and not be deducted from your net pay. This should be accounted for in the gross contract rate you are quoted when joining an umbrella company.
Become a permanent employee
Probably the last resort for contractors – but this may be an option if you don’t have any other choice or if your role is in fact more suited to employment.
While the imminent arrival of IR35 reform in the private sector is understandably concerning contractors, many of whom have little faith in their end-client to accurately assess IR35 status, it is thought thousands of businesses are taking a fair and pragmatic approach to the changes.
For example, Qdos, is supporting over 2,200 businesses, assisting them with the fair and compliant implementation of IR35 reform. This approach allows genuine contractors to be engaged compliantly outside the IR35 legislation.
When do the off-payroll rules take effect?
In the public sector, the rules have been live since April 2017. The private sector extension is set to go ahead on 6th April 2021.
The original live date of April 2020 was deferred by one year – to April 2021 – as a result of the COVID-19 crisis.
The official guidance is here.
Essential off-payroll reading
Here are some useful guides which expand on the summary information contained in this article:
- Expert FAQ – is your contract inside or outside IR35?
- What is the small company exemption and why is it problematic?
- Is it worth keeping your limited company if you’re caught by the off-payroll rules?
- Are you truly in business on your own account?
- Can HMRC investigate past contracts retrospectively post-April 2020?
- Off-Payroll FAQ – the most popular queries answered
What should contractors do?
It is probably worth remembering that the contracting industry has survived an onslaught of legislation over the past two decades – many predicted the demise of the profession when IR35 was first mentioned in 1999, for example. This never happened.
However, the extension of the off-payroll rules to the private sector is, without doubt, the most fundamental change to the operation of IR35 since its inception.
Unlike the public sector rollout, it seems likely that most private sector contractors will be impacted by the April 2021 changes, as many work for large clients, not small organisations (of 50 individuals or less).
The CIOT has warned HMRC that “the abandonment of limited companies could create some very messy compliance issues”, particularly at the lower-paid end of the contract market where many workers have less choice over the business structure they operate under. As has been the case following the public sector roll-out, individuals “could then find themselves encouraged into other dubious arrangements that help engagers protect their profitability.”
Likewise, the FCSA also strongly warns contractors from considering joining non-compliant tax avoidance schemes as an alternative to the limited company model.
The organisation’s now ex-chief executive, Julia Kermode, says that “the reality is that the tax and NICs will still be due and HMRC will pursue the individual for this, and with interest, and however tempting, contractors must resist such schemes. We will continue lobbying for all such schemes to be stamped out before any IR35 reforms in the private sector.”
In the meantime, you (as a limited company director) remain responsible for determining your IR35 status. We recommend seeking professional IR35 contract status reviews and taking out tax investigation insurance just in case (it is relatively inexpensive).
For more information, read our new guide which outlines the practical steps contractors can take in advance of April 2020.
Also worth a read – is it worth keeping your limited company if you’re caught by the new rules?
If you’re short on time, make sure you read our IR35 reform FAQs.
What should clients do?
Given the dependence of many large companies on short-term contractors, it is unsurprising that many industry groups have urged businesses to ensure they are prepared for IR35 reform well before it arrives this coming April.
Seb Maley, CEO of Qdos has recommended that businesses “get to work immediately – because contrary to speculation – these changes are manageable. Businesses must rethink contractor bans and reverse blanket determinations, prioritising instead accurate IR35 status determinations that are carried out on a case-by-case basis.
“Meanwhile, CEST, HMRC’s much-maligned IR35 tool, is not fit for purpose, meaning businesses should not rely on it to deliver an accurate assessment of status. Expert IR35 status reviews offer a tried, tested and trusted alternative.”
The FSCA’s Julia Kermode notes that the decision to concentrate on larger rather than small organisations was “foolhardy given that large businesses are precisely the ones that are least well-placed to accommodate the change due to the impact on their IT infrastructure should they need to process deemed payments to their contractors.”
Kermode says that many companies will need to invest in significant IT development to ensure both accounts payable and payroll systems can communicate with each other, given the complexity in processing off-payroll workers’ invoices.
For more information, try our extra guide for clients – what can engagers do to mitigate against the IR35 private sector reforms?
Protection against an IR35 investigation
Find out how to protect yourself with IR35 insurance – to cover the costs of professional representation and even to cover any tax liabilities you are found to owe as a result of a tax investigation.