3 weeks ago
Changes to IR35 payroll working rules.
The IR35 regulations have been around for some time but until this year only applied to the public sector. From 6 April 2021 the IR35 off payroll working rules have been extended into the private sector and we have seen an increase in clients seeking advice over the last few months. Whilst some clients already have a good understanding of the rules and are perhaps wanting to look at changing or strengthening their contracts or terms of business; others have only just turned their thoughts to the changes.
What do the rules say?
When an individual is providing their services to an end user client, via their own limited company set up to provide such services (commonly known as a “personal service company”) or other intermediary company, it is now the end user (Client) who must decide the tax status of the individual. The client does this by completing a Status Determination Statement and giving it the individual. A Status Determination Statement must be completed for each individual. Care must be taken that this is based on that individual’s particular circumstances, and not a general view of how individual usually work with the client.
The client must ask themselves “if we were engaging this individual directly, rather than through a limited company, would they be an employee or would they still be classed self-employed?”. If the only reason they are being engaged via an intermediary is for tax purposes, it is likely that they would be an employee. Whereas if, for example, the individual is genuinely in business on their own account, providing services to a number of other clients during the course of the working week, advertising their services to attract new clients and has no obligation to provide their services on a particular date or time, it is likely they would be self-employed.
If the individual would have been deemed to be an employee, were it not for the fact they were providing their services via an intermediary company, the end user client must deduct tax and national insurance from any fees paid to the individual.
Who do the rules apply to?
The rules apply to services provided to the public sector and to medium and large size private sector businesses.
The rules do not apply when services are provided to a small business. A company is a small business if it satisfies at least two of the following criteria:
- Its annual turnover is not more than £10.2 million.
- Its balance sheet total is not more than £5.1 million.
- It has not more than 50 employees.
Check Employment Status for Tax tool
HMRC has published an online Check Employment Status for Tax tool. It allows clients and individuals to obtain a determination as to off payroll working rules apply and also employment status.
HMRC have said that provided the information given is accurate it will stand by all determinations given by the tool. If any information changes, the tool can be used again to obtain a new determination.
The tool can be found at https://www.gov.uk/guidance/check-employment-status-for-tax
What happens if you get it wrong?
The penalty for getting it wrong will be for the Client, or end user, to meet all the tax liabilities that would otherwise have been met by the contractor.
The most common mistakes so far come about from End Users not taking sufficient care over their determinations. Examples provided by HMRC of such practices include the following:
- Applying a blanket determination to a group of workers,
- Inputting inaccurate information
- Assigning determinations to insufficiently skilled persons
- Failing to provide proper training.
If you haven’t already done so, you need to carry out a review of the working arrangements of contractors and consultants and complete a Status Determination Statement for each contract.
For those still in the process of doing this, it will be welcome news that the Chancellor has announced that the government will not be heavy handed when enforcing the new rules in the first year. However that doesn’t mean that businesses can simply put off compliance. You should seek advice if you need help with carrying out a review or completion of a Status Determination Statement, are not sure of the tests or need your contracts or terms updated.