Off Payroll Working Rules- updated on 3rd October 2020
The off-payroll working rules, known as IR35, were introduced in 2000 to ensure that individuals who work like an employee, but through an intermediary such as a company, pays similar taxes to other employees.
Important changes are being introduced in April 2021. There has been a lot of press recently (most of it negative) stating how many businesses are going to be badly impacted by the changes.
There is no doubt there will be an impact. This legislation is being introduced to combat non compliance of the legislation. Like all changes in legislation, whilst the intentions may be fine in practice things are not always straightforward!
The problem is many large businesses do not want to employ individuals because of the costs of employment (holiday pay, redundancy pay, sick pay, maternity and paternity pay, employer’s national insurance, pension costs etc…).
So what can they do to avoid employing the individual?
Self employment probably won’t work as HMRC could still deem the person an employee and hold the employer responsible for any underpayment of PAYE and national insurance. One solution however used by many businesses is to request that the individual invoices them through their own limited company. By doing this the risk for the employer being assessed for PAYE and NI is removed.
Currently the off-payroll working rules, known as IR35, work in a way that ignoring the intermediary (the individual’s company) if the individual would then be viewed as an employee of the company PAYE and NI can be assessed on the individual. This financial risk however lies with the individual (the employee) and not the employer.
This is all changing on 6th April 2021.
The reforms are designed to tackle non-compliance with off-payroll working rules by shifting the responsibility for determining the tax status of individuals engaged through their own limited companies to the employer using their services, provided that employer is a medium or large organisations in the private sector. Similar rules have been in force for the public sector since 2017.
The good news is that small companies engaging individuals in this way are not impacted. A small company is one that meets two of the following 3 criteria:
- Has turnover of not more than £10.2m
- A balance sheet total of not more than £5.1m
- Average number of employees not more than 50.
Many medium and large companies, particularly in the financial services and construction industries, have taken advantage of the old rules. Some companies in construction have blatantly abused the legislation by forcing individuals to be engaged through limited companies rather than employ them.
However the abuse only relates to those individuals who are not genuinely in business. Those individuals who are genuinely in business should in theory not be impacted.
The problem is two fold:
- The risk from 6th April 2021 moves to the employer (the medium or large organisation) who now has to make the assessment as to whether IR35 applies. This added administrative burden could result in many medium to large companies deciding, at least in the short-term, not to engage any contractors which could include those who are genuinely in business.
- The assessment of whether an individual is genuinely in business or not is not as easy as it might seem.
The government has tried to assist in the assessment by providing an online tool called the “Check employment status for tax” (CEST). However the tool has come under intense scrutiny and criticism. The tool has been created by HMRC and the latest version follows very much HMRC’s interpretation of the legislation and fails to take into consideration crucial areas such as mutuality of obligations and has a very rigid view of what is deemed to be control.
The tool is not conclusive and for those contractors checking whether IR35 applies or not there is a strong likelihood that the tool will provide a negative answer even though in practice the contractor is likely to fall outside IR35. The weakness of the tool could result in many “employers” making the wrong decision and dispensing with contractors or forcing them to be engaged under PAYE.
What does this mean for businesses preparing for the new off-payroll working rules?
At this stage nothing has changed. The original legislation was suppose to be introduced on 6th April 2020 but was delayed. It is possible that there maybe a further delay as a result of the current economic problems and us leaving the EU but it seems likely that the rules will come into force as planned on 6 April 2021 and businesses should continue to prepare for the changes.
If you are a contractor working for a medium or large client company then you need to take action now to confirm with your client or agency what is going to happen on 6th April 2021.
If you are a contractor working for a small client company then nothing changes. The only thing you need to continue to consider is are you genuinely in business? If you are in this position then you should already be doing this.
If you are a contractor and are unsure whether you are working for a small, medium or large client company then you can ask the client company for confirmation of their size.
If you are the small-sized client company in the private sector you’ll not have to decide the employment status of your contractors. This will remain the responsibility of the contractor’s intermediary (their limited company). However, you must confirm your size if asked by the person or organisation you contract with, or the contractor. This is to make sure that you, agencies and contractors can consider what rules apply.
If you are a medium or large client company engaging contractors then you need to carry out a detailed assessment of all your limited company contractors now. New section 61N sets out the requirement for a status determination statement for engagements covered by the new rules. A status determination statement states whether or not the employment status test indicates that the worker is to be regarded as an employee for tax purposes, and the reasons why this conclusion has been reached. The statement is however only valid if the client company has taken reasonable care to arrive at the conclusion.
If a statement is not provided to the contractor then the client company remains liable for any tax and NI that would arise.
If a client ceases to be medium or large they must withdraw the status determination by notifying the contractor and/or the agency that they have ceased to be medium or large at the beginning of the tax year. If they fail to do so they are treated by HMRC as still being a medium or large company and therefore still liable for the tax and NI.
The contractor does have the right to appeal the decision but only if the contract hasn’t concluded. The client has 45 days to respond and to either confirm the status determination or to withdraw and replace it, with reasons. If the status determination is reversed , the replacement must state the date from which the new status will apply.
We can see that the above rules could cause major problems if the status determinations are challenged once the legislation is in place as there will be major issues as to how to unravel any tax and NI stopped by the client under the new rules. It is therefore imperative that if you are a medium or large company that all existing contracts are reviewed now and determinations made before the new rules are applied.
Determining employment status is not easy. For most cases it is clear cut, but there are many situations where the position is far from clear. If you need help and advice on whether the legislation will affect you then speak to your adviser now or contact us here.
The content in this blog has been updated (originally written on 22 January 2020) and is correct as at 03/10/2020 and See terms and conditions.