IR35 tax rules are changing. With the Covid-19 crisis continuing it may have slipped off the radar for many that changes placing responsibility on private sector companies to determine consultants and contractor’s status for tax are coming in on 6 April 2021.
These changes were originally due in April 2020 but were delayed due to Covid-19. From 6 April 2021 companies will be required to complete a “status determination” for each of their consultants or contractors that are providing services via a personal service company. If the outcome is that the consultant or contractor should in fact be treated as employed, it is then for the company to ensure they are placed on payroll and taxed appropriately.
In this article, we summarise the changes and provide a step by step timeline for companies to follow to meet the new requirements.
We have set out below an action plan and suggested time line to make sure you meet these requirements and protect your workforce for the future.
Personal Services Companies (PSCs) became increasingly popular in the 1990s and allowed individuals to structure their working affairs in such a way that resulted in individuals paying less tax and national insurance. Rather than contracting as an individual, in which case they may be classed as employed for tax status, the individual sets up a company, and then offer their services via that company and is considered self-employed for tax purposes.
Overtime the IR35 legislation has been gradually introduced to recover tax in this area. Most recently from April 2017 Public Sector bodies have been required to determine if IR35 applies to their ‘off-payroll’ workers. This change saw an increase in tax revenue and a decrease in the resources that HMRC was required to utilise to collect revenue.
Following this success in the public sector, the Government announced last year that the new IR35 rules would apply within the private sector as well from 6 April 2020. However the Covid-19 crisis meant that the government delayed the implementation of the changes. These changes are now coming into force on 6 April 2021.
This deadline is now fast approaching and you must not let these changes slip off your radar. Medium and large sized private bodies who engage with off-payroll workers through intermediaries or PSCs will be required to determine their status and whether or not tax and national insurance should be paid. It will be the end user client who has responsibility for making this assessment, regardless of how many other bodies are between the worker and the client. If there are agencies in between then they will be advised of the status of the off-payroll worker by their client and will need to make the subsequent administrative adjustments to pay.
The new rules are complex but essentially the question a company will need to ask, when using a personal service company to provide services to it, is “whether the person working under that arrangement (i.e. the worker) would be regarded as an employee if the services had been provided under a contract agreed directly between the worker and the company”.
In practice, this is likely to prove a tricky task, particularly with work relationships that have factors which both point to and point away from, IR35.
The Government has introduced a self-check tool to help companies with this assessment. Known as CEST (Check Employment Status for Tax) it can be found online and is free to use. However, this tool has limitations. While the CEST tool is a helpful starting point, companies who use PSC’s are at risk of penalties if they do not make assessments properly and should always seek professional advice to protect themselves and to sense check the results.
There is some good news for smaller organisations as small companies will not be affected by the changes. A company will be classed as a small company if it meets at least two of the following 3 criteria:
Agencies and compliant umbrella companies are also unlikely to be affected as they pay workers net of tax and NICs. Those companies will not need to consider whether the PSC’s they use are caught by IR35 or not.
All companies should act now to:
Companies must ensure that they have complied with these requirements by 6 April 2021. The sooner these assessments are undertaken the more time clients and consultants/contractors will have to ensure any adjustments to current arrangements can be made in good time.
Paris Smith LLP is able to assist to guide you through this process, provide you with key documents you need and help you undertake or review individual assessments. If you are interested in discussing IR35 and its implications for your business further please contact Tabytha Cunningham or Charlotte Farrell.