As the IR35 reforms take effect in the private sector from April 6, we answer a number of frequently asked questions. What is clear is that, if they haven’t done so already, businesses need to take action now to ensure they don’t fall foul of the rules.
What is IR35?
IR35 is a piece of tax legislation which allows the government to recover employment taxes from businesses using contractors, intermediaries or limited companies. It applies where individuals working for a business are working as “disguised employees”, for example, being engaged and paying tax on a self-employed basis but under terms and conditions that would suggest that they are actually employees. In such circumstances, they would be benefitting from the tax efficiencies of self-employment and not paying the tax that an employee would be required to pay.
Where has the concept of IR35 emerged from?
IR35 came into force in April 2000 in response to an increasing number of individuals providing contract services to client via their own personal service companies (PSCs).
What is happening in April 2021?
IR35 legislation is changing for those engaged by a medium or large client in the private sector. The legislation provides that the burden of making a determination of employment status will shift from an intermediary (usually a PSC) to medium and large clients that are using the services of the intermediary. Once a decision has been reached as to status, the end user client must confirm this by providing a “Status Determination Statement” (SDS) to the contractor and any agency or other provider in the supply chain.
What does this mean in practice?
From 6 April 2021, if HMRC determine that a contractor is inside IR35 but has been treated as being outside of IR35 and as such, there has been an underpayment of tax and national insurance on the services they have provided, there are circumstances where the liability for the underpayment could move up the supply chain.
If the end user has failed to issue a SDS, use reasonable care in preparing the SDS, or deal with an appeal or challenge in respect of the SDS; OR if the fee payer has received a complaint about a SDS but simply doesn’t pay the tax and NICs to HMRC and if HMRC can’t recover the IR35 debt from the fee payer then they can recover the debt from the first entity in the supply chain (Agency 1) or if there is no realistic prospect of success from Agency 1, the end user.
Is there any chance that implementation of the IR35 reforms will be pushed back?
Reforms to off-payroll working rules had been delayed by 12 months last year as part of the Government’s response to COVID-19. Never say never but there is no indication that further delays or a U-turn is expected; businesses should therefore prepare themselves for changes that will take effect on 6 April 2021.
What are the consequences of getting it wrong?
HMRC’s recent guidance focuses on their approach to compliance, in the first year, being supportive and ‘light touch’ regarding penalties where mistakes are bona fide. In the briefing, there is a clear message of support set out through the compliance principles. However, this light touch approach should not drive complacency nor lull businesses into a false sense of security in respect of IR35. During the first year, businesses are expected to fully comply with the IR35 requirements but will not be penalised for genuine mistakes. Alongside the supportive message set out by HMRC is that HMRC fully expects businesses to take responsibility to comply and determine if the off-payroll working rules are applicable but will support them through webinars, workshops or one-to-one advice.
Whilst it is encouraging that HMRC are taking a collaborative approach to compliance in the first year to assist businesses in implementing the legislation correctly, businesses should not view this help and lighter touch with respect to penalties as an opportunity to push compliance into the long grass. HMRC have made it clear that they will not tolerate deliberate non-compliance and there is a clear expectation from HMRC that businesses take reasonable care to apply off-payroll working rules.
HMRC have made it clear that they may contact businesses which operate within specific sectors where there is a high usage of personal service companies to discuss the changes and ask for information to confirm compliance.
How do I know if my business will be impacted?
If you are a medium or large business and use self employed contractors, flexible workers or intermediaries to manage the supply of your labour then it is likely that these changes will impact your business. Likewise, if you are a recruiter or intermediary in the labour supply chain they are likely to impact on your business.
What do I need to be doing now?
When reforms in the public sector were implemented in 2017, one of the main issues was that companies were unprepared and consequently unable to accurately determine the correct status of their contractors.
It would therefore be prudent for businesses to take steps now to ensure that they are prepared by the time the changes are implemented in April 2021. You might want to think about:
- Undertaking a full audit and status review of your workforce: this will entail looking at the true working relationship between your business and any contractors in line with the various legal tests that point to either self-employed or employed status. It is advisable that this is done on a case-by-case-basis.
- Reviewing your processes and procedures: do you have the skills internally to carry out status reviews and to issue an accurate SDS. Do you have the appeals process set up and the resources to manage any appeals or challenges which are made? Do you have audit procedures in place with labour suppliers to ensure that you have visibility of the supply chain and the ability to spot and deal with problems quickly?
- Reviewing your contracts with self-employed contractors: ultimately it is the reality of the working relationship that HMRC will attach the most weight to as part of any enquiries, however, it is important to ensure that your contracts with self-employed contractors (and supplementary documentation) support self-employed status and do not contain unnecessary restrictions that are not needed or exercised in practice.
- Reviewing your agreements with suppliers: we recommend that you review your agreements with agencies and other intermediaries and ensure they are updated to provide for the carrying out of the SDS and appeal process, they set out each party’s obligations regarding the appropriate deduction and payment of tax depending upon the individual’s IR35 status and to include appropriate protections for your business in the contract.
- Carrying out a review of your labour model: once the above steps have been actioned, you will be in a position to consider the additional costs to the business should any contractors fall within the scope of IR35 and whether their continued engagement remain financially viable and within your risk profile.
With a wealth of experience in this area, the Recruitment Team at Brabners can help you take the necessary steps to ensure your business is IR35 ready and compliant. We can take you through the impact the legislation will have on your business and help you mitigate any risks.
