On the 6th April 2021, following the delayed rollout due to the COVID-19 pandemic, changes to the existing IR35 legislation in the Private Sector come into place in the UK, impacting organisations using consultants or contractors working via a Personal Service Company (PSC) arrangement. If you have UK based contractors, who could be challenged as being “disguised employees”, then you may be exposed to greater penalties. Find out more about if it impacts you and get ready for the changes with this article.
What is IR35?
The UK’s IR35 legislation is a set of rules designed to be applied to assess whether contractors are genuinely – contractors rather than deemed employees, for the purposes of paying tax – contractors who work through Personal Service Companies (PSC’s) benefit from a level of tax efficiency. They do not receive payment for absences; however, they do have flexibility over the how and when they carry out work ‘control’. Contractors and their clients try to maximise this tax efficiency by working as if they are self-employed, however they are really employees in practice. The rules were designed to tackle this issue.
How does the IR35 rule change after April 2021 in the UK?
From the 6th April 2021, how the rules are applied to IR35 will change within the Private Sector (this has already occurred in the Public Sector). All medium and large-sized private sector companies will be responsible for deciding whether the rules apply to their contractor engagements, – meaning, it will be the businesses responsibility to assess and decide whether their contracts with PSC’s are operating inside or outside the IR35 rules.
IR35 applies whenever a contractor is providing its services through a personal service company (‘PSC’) to a business; and if the relationship is actually found to be that of deemed employment and employer, then income tax and national insurance charges would be applied to fees earned by the PSC. Historically it has been the domain of the PSC to declare whether any of their engagements fall inside IR35 at the end of each tax year. From 6 April 2021, for medium or large businesses, this responsibility will shift to the end client. Affected end clients will be required to make a ‘Status Determination Statement’ (‘SDS’) at the beginning of each assignment and provide a copy of this to the employment business and the contractor.
Inside or outside of IR35?
Questions to consider determining if the contractor are indeed employees, i.e., “inside” or “outside” the IR35:
Supervision, Direction and Control – Contractors should have the freedom over how and when they complete their work. Therefore, in practice and contractually, are there restrictions over start/finishing times, days required to work? Is the work overseen excessively by the client? If services are not just provided for an agreed assignment, but are for tasks as and when required, this could be an issue.
Right to Substitution – Is there the ability to send a substitute to carry out the work instead, or does it have to be the named consultant?
Mutuality of Obligation – Is the client obligated to offer the contractor work and is the contractor obligated to take this? Therefore, is the contract offered on a project-by-project basis, with payment on completion of this and no obligation to be given and to accept further work? Can the contractor accept other assignments from other clients?
Other factors affecting the IR35 status:
- Is the contractor using the client’s equipment?
- Is the contractor taking their own financial risk as an independent company? Do they need their own Professional Indemnity Insurance?
- Is the contractor considered to be part of the Company’s structure, maybe they have Direct Reports?
- Is the contractor working for other clients?
If any of the above apply to your contractors, then it might be that they are deemed disguised employers and actions should be taken.
Small companies’ exception to the new IR35 rules
For Private sector business considered “small”, PSC’s will remain responsible for deciding the consultant/contractor’s employment status and whether IR35 applies. Companies Act 2006 defines a medium-large business to somewhat that has two of the following features ;
- a turnover of more than £10.2 million
- a balance sheet total is more than £5.1 million
- 50 employees or more (based on group size, not only the UK employees)
What happens to companies not following the IR35 rules?
Non-compliance as an employer is associated with penalties, however you will not have to pay fines for errors relating to off-payroll assignments in the first year, except in cases of intentional non-compliance. Starting to review your work with contractors now is, however, a good idea in preparing for April.
Employment business operating as consultancies and IR35
Some employment businesses operate as consultancies. The new IR35 rules do not apply to contracted-out services. Employment businesses operating as consultancies will have to question themselves whether the engagement with the client is a fully contracted out service (and therefore outside the range of the new rules) or a contract for the supply of labour (and therefore caught by the new rules). Usually, a fully contracted out service will involve providing goods and material as well as work.
If the employment business determines that the engagement is a contracted-out service, then it is the employment business that will be the client for the purposes of the new IR35 rules. The employment business will then have to decide if it meets the criteria for being a medium or large company, and if so, it will then have the responsibility for undertaking the ‘SDS’ and, if relevant, accounting for income tax and national insurance due.
Actions to prepare for businesses using contractors
To prepare your business for the new IR35 you should;
- identify contractors who work in this way
- decide if they are “inside” or “outside” the rules
- inform the contractors of their status determination, and any agencies you engage with
- be ready to add them to payroll if needed – this may involve setting up a UK subsidiary for many of our clients
- be ready to deal with any disputes
- maintain a robust audit trail, and test your processes, systems and controls
If you are concerned or want help with your compliance do not hesitate to contact our HR Manager at firstname.lastname@example.org or visit www.goodwille.com/human-resources. Goodwille can act as a fully outsourced HR service provider or support chosen areas of your HR functions.
Goodwille provides essential business services to foreign-owned businesses looking to enter, grow or scale in the UK, to find out more visit goodwille.com