The new IR35 rules are set to come into force from April 2021 after being delayed from April 2020 due to the Coronavirus pandemic. So far, there has been no indication that the date for implementing the new rules is to be further pushed back this time. Below is a summary of the criteria for applying IR35, updates to the rules since last year and what the new rules mean for your business.
Under the IR35 off-payroll rules, if a contractor is deemed to carry out similar work or the same work as a permanent staff member, their employer is required to deduct income tax and national insurance contributions as if they were an employee.
The legislation has been introduced to ensure workers undertaking similar roles are paid the same tax regardless of whether they were an employee or a contractor.
IR35 applies to organisations in the private sector with an annual turnover in excess of £10.2 million, a workforce of more than 50 employees; and/or a balance sheet of more than £5.1m (medium to large businesses), regardless of how the contractor supplies its services.
Small businesses are exempt from the new IR35 rules; a small business can be defined by meeting two or more of the following criteria, as outlined by the Companies Act 2006:-
- annual turnover of £10.2 million or less
- 50 employees or less and/or
- balance sheet of £5.1 million or less
If your business meets two or more of the above criteria, the responsibility for determining the IR35 status of an intermediary, remains with the Personal Service Company (PSC) and the new rules do not apply. We are happy to go through the criteria with you, if you have any questions or are unsure of which category your business falls into. If you are hovering near any of the criteria maximums let us know because applying the criteria can become complex if you are near the maximums.
The changes to the rules will see a shift in responsibility for deciding whether contractors fall inside or outside the IR35 tax rules on to the employer and no longer the individual contractor.
Updates to new rules
During the pandemic the IR35 rules have been amended for the April 2021 launch.
The IR35 reformed rules will only apply to services provided on or after 6 April 2021. If the services are provided in full but payment is made after this date, the new rules will not apply to the payment. Where services have started, but not yet been completed before 6 April 2021, the rules will only apply to the portion of the payment that relates to services which fall after 6 April 2021.
The service provided must have a UK connection in order for them to be brought into scope under IR35. Even having a UK based permanent establishment, is enough for the rules to apply. However, if there is no UK connection, the rules do not apply.
There is now an obligation on companies defined as ‘small’ under the Companies Act 2006, to confirm whether they are exempt due to their classification as a small company.
With regards to intermediary companies, the draft legislation was limited to companies in which the contractor held a material interest of at least 5%. This threshold has been lowered and now also includes any company from which the contractor has received, or is entitled to receive, a payment.
Employers- What do you do next?
The first stage is to look at your current workforce and determine who is supplying their services through a Personal Service Company (PSC) and whether the contractor is an employee or self-employed. This can sometimes be tricky, especially if they have carried out work for you for a long time, the lines between employee or self-employed can become blurred. There is a lot to consider to determine the contractor’s employment status, HMRC have provided a helpful online tool (CEST) which can be found using this link.
If you are unsure though, we are able to help you through this, please contact us for support.
Once you have established their status for tax purposes, you must confirm that status as well as the reasons for reaching that conclusion in a Status Determination Statement (SDS). The SDS must be shared with the contractor and the agency/intermediary (where one is been used), before processing any payments to the contractor. A conversation with the contractor(s) along-side producing the SDS, shows your due diligence on the new rules and that you are taking it seriously.
Following on from this, you must have a dispute resolution process in place if a contractor wishes to challenge the decision you have made about their IR35 status. Although, if a contractor is regarded as falling outside of the IR35 rules, a dispute would be unlikely. If you would like us to draft a dispute resolution process for matters such as this and support in implementation, please get in touch.
Where the organisation determines that the contractor falls outside of the IR35 rules, then the Personal Service Company (PSC) can continue to be paid as usual.
Other steps to consider are to review current and future projects which are due to extend or start beyond April 2021 and put processes in place to determine if the off-payroll rules will apply to those projects. This may include identifying who in the organisation is going to be responsible for making the Status Determinations and looking at how payments will be made to contractors within the IR35 rules.
If you would like to talk through your individual business and how IR35 applies to you, please contact us using the details next to our profiles on this page. We are open and operating as normal and are here to help.