As you are no doubt aware by now, the implementation of the new rules for off-payroll workers in the private sector (IR35) was deferred for the second time last April due to the pandemic. The changes will now come into effect from April 2021.
With the pandemic still creating huge challenges for business, it is possible that IR35 has slipped off the radar for some end-client contract users. There is no indication from the Government that the implementation will be deferred again this year and so it’s critical that companies and contractors alike are prepared for the change.
We thought it would be useful to give you a quick refresher.
WHAT IS IR35?
The Intermediaries Legislation known as IR35 has been around since 2000. Its aim, when introduced, was to remove the tax advantages of providing services via a Limited Company for individuals who are not truly in business on their own account. The rules sought to identify ‘disguised employees’; those whose working practices had the features of traditional employees rather than those working on their own account.
The application of IR35 in practice has, according to successive governments, failed to crackdown on this so called ‘disguised employment’ and they consider many Limited Company owners continue to operate illegitimately outside the rules. In response to this avoidance new ‘off-payroll’ rules were implemented in the public sector in April 2017 and this will extend to the private sector from April 2021.
DETERMINING IR35 STATUS
The end user (client) will now be responsible for determining the employment status of all off-payroll/contract workers for their organisation. This includes all PSC contractors.
HMRC will require that the end user produces evidence of their determination for each and every contractor in the form of a Status Determination Statement (SDS). The legislation prescribes that the end user will be required to share the SDS with all parties in the contractual chain, including the PSC contractor.
In theory, this should rule out blanket determinations of inside IR35 by end users as the SDS will be considered to be invalid if it is later found that the end user has failed to take reasonable care in preparing, assessing and agreeing the determination.
Where the client deemed a contractor to be inside IR35 then the client or the employment intermediary (through which the contractor is engaged if there is one) must apply statutory deductions i.e. tax and NIC from the contractor’s pay and also pay Employer’s NIC as if the contractor were a traditional employee of the client.
RIGHT OF APPEAL
The contractor will have the right to appeal. By allowing the contractor a voice in the determination process, it is hoped that the number of disputes will be kept to a minimum. The legislation makes statutory provision for the contractor to appeal any determination made, with the end client being responsible to respond within 45 days of the appeal. Where an appeal is successful, a new SDS must be furnished by the end user.
HMRC has confirmed that the first agency in the supply chain “has enough visibility of the labour supply chain to influence compliance” and also that the end user/client can influence compliance through careful selection of the suppliers and agencies that they engage with.
The latest consultation position will therefore hold; liability can transfer up the supply chain as far as the end client if HMRC is unable to collect from the first agency. HMRC has indicated that further guidance will be provided on circumstances where unpaid liabilities are not transferable up the supply chain.
HMRC has also confirmed that small businesses, as determined in sections 382/383 of the Companies Act 2006, will be exempt from the new IR35 rules where they are the end user.
WORKING WITH YOU ON IR35 CHANGES
At Jonathan Lee, we pride ourselves on working closely with our clients and contractors, and this will continue throughout the implementation of the changes to IR35.
If you have any questions about IR35 and its impact on you as either a client or a contractor of Jonathan Lee, please feel free to either email me or give me a call on 01384 446115.
You can download our handy guide to IR35here.