IR35 changes due to come into effect from 6 April 2021.
Do you know what the rules are and how they affect you and the businesses you provide services to?
Delayed by 12 months as a result of the COVID-19 pandemic, changes to the rules for individuals who provide professional services through certain third party entities, known as IR35, are due to come into effect from 6 April 2021
A recent survey of 2,000 of individuals providing services through a limited company, conducted by FreeAgent the cloud base accounting software company, highlighted that more than 57 percent of responders did not know what IR35 was. It is important in the light of these upcoming changes for contractors operating in this way, and the business that employ them, to be aware of the rules and their respective responsibilities under them.
The IR35 rules have been with us for some time now, having originally been introduced to combat a problem seen by HMRC where individuals set up vehicles through which to provide their services that allow them to reduce their tax and more importantly national insurance liability. It was felt that these arrangements allowed people to reduce their tax liability, but from a day to day perspective they operated in the same way and were being treated no differently than employees of the company.
Under the IR35 rules, individuals providing their services to private sector companies through a third party entity, are required to assess the arrangements they had with their client against a range of criteria set out by HMRC. These then determine if the arrangements are in essence an employment relationship. Where there is an employment relationship, the income from that contract is subject to a deemed employment income calculation on which employer and employee national insurance (NIC) and PAYE is due.
From 6 April 2021, contractors who provide services to public sector organisations, medium or large sized organisations with more than 50 employees, turnovers in excess of £10.2m or a balance sheet total of £5.1m, or who work through an intermediary such as a personal service company (PSC), will have a responsibility for declaring the employment status of contractors they engage for tax purposes. Under the new regulations, the employing organisation is now required to file a ‘status determination statement’ along with the reasons for their decision.
Should a company decide that a contractor is employed for tax purposes, they or the agency supplying the contractor, is liable for deducting and submitting to HMRC the relevant tax and NIC payments, before they pay the contractor. If they determine that the off payroll working rules do not apply, the contractor will remain responsible for meeting their tax obligations.
However, a status determination can be disputed through their hirer’s status disagreement process. For this, a contractor will need to explain to the hirer why they are challenging the decision and the organisation will have 45 days to respond. If they do not respond within the 45 days, then the organization becomes responsible for the tax and NICs.
Businesses outside the UK that use a third party entity to provide the services of a consultant based in the UK, will not be affected by these rules, providing they would not be considered to have a branch or permanent establishment in the UK
When the business to whom the services are being provided do not fall within the definition of a medium or large enterprise, or are based overseas as described above, then the position will remain as it is now and the provider of the services will need to determine whether IR35 applies to the arrangements and then calculate any deemed employment payment accordingly.
The lack of general awareness of the rules would seem to highlight the potential that these rules are not being applied properly in many cases. The HMRC guidelines state that: “It is also possible that you will pay additional income tax and NICs if you had not previously been applying the off-payroll rules (IR35) correctly.” It has also been estimated that the IR35 legislation could reduce a worker’s net income by up to 25 percent. However, HMRC will not use information resulting from these changes to open a new enquiry into earlier years, unless “there is reason to suspect fraud or criminal behaviour.”
Another recent survey by recruitment firm Harvey Nash, showed that one fifth of firms are planning to stop using contractors as a result of the IR35 legislation. A spokesperson from the freelancer industry body IPSE has also suggested that self-employed confidence levels are now at an all-time low, further highlighting the need for the government to better inform those most affected by the potential changes. The Chancellor has indicated that these rules are ripe for a wider overhaul and hopefully, that will lead to a simplification and therefore better understanding of, and compliance with, the new rules so that there can continue to be a flexible workforce.
For further information on the new IR35 legislation or any other tax query, please contact our dedicated team on 01932 320800 or email firstname.lastname@example.org.