IR35 changes delayed: What’s happening with IR35?
The off-payroll working rules (often referred to as IR35) (“the Rules”) were designed to try and ensure that those workers working like ‘employees’ via their own company (often referred to as “Contractors”) pay similar tax to their comparator employees who are directly employed by an organisation.
The HM Treasury has commented on the effect of non-compliance with the Rules, which results in Contractors paying less income tax and National Insurance contributions (“NICs”).
Currently, the Rules apply to the public and private sectors in the following ways:
- In the public sector, the organisation engaging the services decides the employment status of the Contractor (which therefore determines the Contractors’ employment tax status); and
- In the private sector (including some charities), the individual Contractor decides their own employment status.
What’s happening with IR35? What is changing?
The changes mean that medium to large private organisations will now need to assess and determine the employment status of any Contractors they engage. If an organisation decides that the Rules do apply, they will need to deduct income tax, employee NICs and also pay employer NICs.
The Rules were due to come into effect on 6 April 2020 but due to the Coronavirus outbreak, the changes have been deferred until next year and will only apply to any payments made for services provided on or after 6 April 2021; if any services have been provided to an organisation by a Contractor before this date, the Rules will not apply. If an organisation engages a Contractor and the services were provided both before and after 6 April 20201 and the Rules apply, an organisation will be required to make a ‘just and reasonable’ apportionment with regards to the payment of any potential income tax, employee NICs and employer NICs.
Organisations must give Contractors a ‘Status Determination Statement’ confirming whether they consider the Contractor to be self-employed or employed for tax purposes and provide details as to how this decision was reached.
If a Contractor disagrees with the result of the determination, they can dispute it. A response must then be given to a dispute to a determination within 45 days from the date it was received, otherwise the Contractor’s tax and NICs become the organisation’s responsibility. During the 45 day response period, the organisation should apply the Rules in line with their original decision until they have concluded their reassessment of the Contractors’ status.
What are ‘medium and large’ private organisations?
An organisation will be considered to be ‘medium or large’ if two of more of the following apply to the organisation:-
- it has an annual turnover of more than £10.2 million;
- it has a balance sheet total (total amounts shown as assets in the organisations’ balance sheet before taking off the liabilities) of more than £5.1million; and/or
- it has more than 50 employees.
The Rules may also apply to connected and associated companies; if a parent company is considered medium or large, their subsidiaries will have to apply the Rules.
Are there any exemptions?
The Rules will not apply to small private organisations and Contractors engaged by small organisations will continue to determine their own employment status.
An organisation is deemed to be small if at least two of the following apply:-
- its annual turnover is £10.2 million or less;
- it has a balance sheet of £5.1 million or less; and
- the number of employees is 50 or fewer.
Getting ready for the changes
If you think the Rules may apply to your organisation, you should review your current workforce (including those engaged through agencies and other intermediaries) to determine who the Rules may apply to. To assist with this process, HMRC have devised an online tool ‘Check Employment Status’ for Tax’ to help with determining whether the Rules apply. It would also be advisable to start putting processes in place now, to be used in the future, when determining the status of any Contractors going forward.
Despite the deferral of the changes, it’s important to be aware of them and plan accordingly. If you require assistance reviewing any of your existing documentation ahead of the 6 April 2021 to establish whether any contracts and agreements with your suppliers, customers and contractors need amending ahead of the changes, please get in touch with the Corporate and Commercial Team who would be happy to assist.