Off-Payroll Working (IR35) – New Rules from April 2021
There are some big changes in rules around IR35, that will come into effect on 6 April 2021. This will not impact many businesses that we deal with here at Smarter Accounting, but for those that are affected the changes will be big. In this blog we will explain the rule changes coming in and run through the IR35 / Off payroll working concepts that all businesses should be aware of. These rules were originally due to be implemented in April 2020 but were put back due to Coronavirus.
What is IR35?
HM Revenue & Customs (HMRC) introduced IR35 rules in 2000 to tackle off-payroll working / disguised employment. Some contractors and their hirers/clients were choosing to work through a Limited Company / Partnership / Self Employment to avoid the costs associated with employing people.
For the contractor, this created a more tax efficient model where less tax and national insurance could be paid. In addition, more costs could be deducted from earnings to reduce further the tax and national insurance payable.
The benefits for those businesses hiring contractors/workers is that they do not have to pay employers national insurance or give contractors benefits that a standard employee has (like contracts of employment, employee rights, pension etc).
IR35 was introduced to assess whether contractors are, for all intents and purposes, employees when they take on work for their clients. The rules were supposed to ensure that income tax and national insurance payments were made when required, as if the workers were just normal employees. However, IR35 has been a constant issue, with many struggling to understand the rules and HMRC struggling to fight cases successfully.
Various attempts have been made to strengthen the IR35 legislation with HMRC reviewing the rules and even the House of Lords having a go at it. Nothing has really worked, until now!
What rule changes are being made?
Up until now the responsibility for ensuring that IR35 rules are adhered to have been held by the contractor. HMRC have come up with a cunning plan to pass this responsibility, and therefore risk, to the Hirer.
From 6 April 2021 all medium-sized and large businesses will be responsible for working out the contractor’s employment status, and not the contractor. If the hirer deems that the contractor is caught by IR35 then any fees payable on a contract will be subject to income tax and national insurance at source, deducted by the hirer (and paid over to HMRC).
If you are a contractor and your hirer has deemed you to be caught by IR35, they will issue you with an employment status determination. They will also give reasons for this determination. You will be able to dispute this determination if you disagree with it.
Hirers that are small businesses are exempt from these rule changes. Contractors, irrespective of size, can be caught by this shift in responsibility. To be classed as a small business the hirer must meet two of the following criteria:
- Annual turnover of less than £10.2M
- Balance Sheet of less than £5.1M
- Less than 50 employees
These rules were brought into the Public Sector in 2017 and experience would suggest that hirers took a low-risk approach, and if in doubt assessed contractors to be within the IR35 / Off-Payroll Working Legislation. Interestingly, results from the Public Sector implementation showed that about 25% of contractors were able to increase their day rate because of the changes. To preserve net income, contractors should look for an increase of 20%, if possible.
The Tests for Employed vs Self Employed
The tests behind IR35 decisions and the employment status determinations are principles that consider whether a contract is an employment contract or a self-employment contract. HMRC provides an online tool to help> https://www.tax.service.gov.uk/check-employment-status-for-tax/disclaimer. Some of the principles can be grey and open to interpretation. If a contractor fails on one of the tests it is not automatically deemed to be an employment contract, instead it is about the balance of the results against all the principles. Obviously though, the more tests that are failed, the more likely that the contract is an employment contract. These principles are also useful for employers and contractors to be aware of and bear in mind, irrespective of whether they are caught by these current rule changes or not. The principles are:
- Supervision, direction, control – This relates to how much influence and control your client has over how you complete the work e.g. do you have to work at certain times, certain locations, complete work in a certain way
- Substitution – Could you bring in someone else to perform the contract? E.g. if you were ill. Or do you need to complete the work yourself. If you can’t send someone else, then you are likely to be caught by IR35
- Mutuality of obligation – Does the hirer/employer have to offer you work and are you obliged to accept it? If an element of this exists, then the contract may fall inside IR35
- Equipment – Do you provide your own equipment or does your client/the hirer provide it? If the client provides it then again there could be a leaning towards being caught by IR35
- Financial Risk – The self employed normally carry risk, therefore for the contract, if you make an error is it your responsibility to fix it? In your own time? If so, this points towards the contract being outside of IR35
- The way that you are paid – Self-employed are normally paid when the work is complete or on certain project milestones
- ‘Part and parcel’ of the organisation – If contractors become so ingrained in the structure of the hirer/client with people reporting direct to them for example, then the contract is leaning towards IR35
- Exclusivity – Do you work for other clients? Typically, the self-employed work for multiple clients
- Intentions of the parties – The contract should look like the relationship is that of customer and supplier, and this should be genuine. HMRC can look at the scenario and if they decide the intentions were different, they can ignore the contract
- Business ‘on your own account‘ – The business you are running should look like a business. If you are running a website, have your own office premises, even employees then this would suggest a trading business and not an employment contract
Hopefully the above gives you a flavour of the tests that are applied and what HMRC are looking for within these tests. Hopefully, you also understand why they are looking for disguised employment arrangements. One of the most important things is to agree the status with your client. If considered from the start, then the business relationship can be engineered so that it falls outside of IR35. Good luck!
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