Changes to the off-payroll working rules (IR35), that were postponed due to Covid last year, came into effect on April 6, 2021.
IR35 is the abbreviation used for the ‘intermediaries legislation’, which is a set of tax rules designed to combat tax avoidance by workers – and the firms who hire them – when the worker provides services to a client through an intermediary. This includes providing services through a limited company, ‘personal service company’, or as an independent contractor.
The changes to IR35 have been put in place to ensure that workers, who would have essentially been an employee during the time they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as other employees.
Though HMRC has referred to the new Off-Payroll tax as a reform to IR35, it should be noted that the changes are fundamental, and could have severe repercussions for businesses who are unaware of, ignore, or misinterpret them.
Though the same tests are applied to determine employment status as with the previously existing legislation, the new ‘Off-Payroll tax’ shifts responsibility for compliance and tax liability to the client, who will now hold full responsibility for the assessment of IR35 status.
Despite having been in force since April 2000, IR35 was heavily criticised by tax experts as well as the business community as being complicated, badly designed and badly implemented by HMRC and, as a result, causing unnecessary difficulty and cost for many small businesses.
The changes coming into effect this April for organisations in the private sector were initially introduced into the public sector in April 2017.
The key changes to the new Off-Payroll tax (IR35) include:
- The client will be responsible for assessing the contractor’s IR35 status for each engagement, rather than the supplier of services.
- The fee-payer (i.e., the party in the supply chain closest to the contractor’s limited company, for example, the recruitment agency or the client themselves) will be responsible for calculating, reporting and processing tax via PAYE on payments made to contractors deemed ‘employed for tax purposes’.
- The fee-payer will now also be liable for employer’s National Insurance Contributions (13.8%) and the Apprenticeship Levy (0.5%) on top of the fees paid to the contractor, as well as assuming tax liability risk if HMRC challenges a deemed status.
- If it is proven that the client hasn’t taken ‘reasonable care’ in assessing a contractor’s IR35 status, the client automatically assumes the position of fee-payer.
What do organisations need to consider as clients?
As an organisation, you will have to decide on the employment status of all ‘off-payroll’ workers on every contract you have. You will need to pass your determination, and the reasons for it, to the worker themselves and the person or organization you have a contract with. You are also required to keep detailed records of your employment status determinations, including the reasons for them and the fees paid. It is also advisable to have a process in place for any disagreements that come up from your determination.
In the instance that the new off-payroll working rules are applied, and you are deemed to be the fee-payer, you will need to deduct and pay tax and National Insurance Contributions directly to HMRC.
However, any private sector clients that meet the criteria defining them as a small company (in the Companies Act 2006) will be exempt from applying the new Off-Payroll tax rules. This will remain the responsibility of the worker’s intermediary, as was the case prior to April 6, 2021.
The changes will come as welcome news for many contractors, particularly small or independent suppliers of services, as they will no longer be liable for employer’s NICs which should land with their end client.
The changes also mean that contractors are not required by statute to take measures to assess their own status. However, contractors would be advised to play an active role in the process, primarily to ensure that they receive a fair and considered status assessment, and also to make the process simpler for their clients, helping them to come to the correct determination.
IR35 should not apply to genuine independent contractors, freelancers, or consultants who have their own businesses. However, to avoid unnecessary stress, it is advisable to take the time to understand how the legislation works, apply best practices, and have sufficient proof to explain why you are exempt, in case of an investigation by HMRC.
Agencies will, in almost all cases, assume the position of fee-payer under the Off-Payroll tax, unless the client is caught failing to fulfil their own obligations, so should be fully aware of their responsibilities.
If you or your business require help in preparing and/or assessing the contracts you have with all your contractors, as well as advice on the points to consider in the determination of your relationship under IR35, please get in touch.
Contact Darren Davies on 01792 439000 or email firstname.lastname@example.org