From 6 April 2021, changes to the IR35 legislation will come into force in the private sector.
These changes will affect all businesses who use limited company contractors for the supply of services, recruitment companies supplying limited company contractors and those individuals that supply their services as self-employed contractors through limited companies.
The IR35 legislation was introduced by the government to ensure that everyone paid their fair share of tax by requiring self-employed contractors who are “disguised employees” to pay tax on the same basis as directly engaged employees and ensuring that the tax efficiency of dividends weren’t used instead of salary. The reality was that it was difficult for HMRC to police compliance with the rules due to the number of personal service companies in existence and as such, the changes taking effect in April 2021 are designed to facilitate better compliance with IR35. The IR35 and the off pay-roll working rules (which sit over the IR35 regime) were initially introduced in the public sector in 2017 and have been extended to apply to medium and large companies in the private sector from April 2020, with the rules taking effect from 6 April 2021.
The effect of the changes are that the end client, i.e. the organisation who is or will be receiving the services of the worker/contractor, will be required to make a determination whether or not the worker would be deemed to be an employee of the end-user client, but for the existence of the intermediary. If the worker would be a “deemed employee”, the intermediary must operate payroll, make deductions at source for income tax and employee’s national insurance contributions and pay employer’s national insurance contributions on the fees received from the end-user client for the services. The changes mean that it will be easier for HMRC to recover any underpayment of tax from other parties in the supply chain, rather than the current position where the liability is usually ringfenced with the contractor.
Contractual terms and reality
In determining whether a worker is a “deemed employee” (and whether they are therefore caught by or “inside” IR35) both the contracts in place and the reality of the situation will be relevant. Whilst it is important that the relevant contracts are drafted in such a way as to reduce the risk of IR35 applying in practice (for example, by including a right of substitution and structuring contracts by reference to completion of a project or piece of work, rather than by duration), it is equally important that the practical reality of the working arrangement reflects those terms.
It is likely that two contracts will be relevant to the intermediary arrangement and will need to be reviewed: (i) a contract between the intermediary and the client; and (ii) a contract between the intermediary and the contractor or worker.
It is important to look at the information being provided by the end-user client and the company paying the fees of the worker, to ensure that appropriate warranties are in place as to how the relationship will operate. To combat the risk of any claims or liabilities arising under IR35, it is important to ensure that appropriate indemnities are included within the contracts so that this risk sits with the party who is responsible for the providing the information, or the party who is responsible for ensuring that the working practices set out in the terms accurately reflect what happens in practice. It is also necessary to ensure that appropriate obligations are in place (and if necessary, indemnities) regarding the deduction of appropriate tax if the worker is in fact deemed to be within IR35, and that there is the ability to audit the supply chain to ensure that the practices match the contractual requirements.
Next steps
We have already seen examples of contractual drafting dealing with the IR35 and the off-payroll rules in public sector contracts. We expect that similar drafting will start to be included in private sector contracts in the run up to 6 April 2021 for all businesses who use personal service companies for the supply of services.
Businesses should therefore review their supply chains and contractual terms to ensure that they address the risks associated with IR35, and that they accurately reflect what happens in practice. Obligations will often be accompanied by indemnities if something goes wrong or if a party is in breach and so it is vital to check the terms and conditions before entering into a contract to ensure that any liabilities sit with the party best placed to make the required decisions.
If you have any questions or would like any advice or assistance in relation to IR35 or your contract terms, please contact a member of our Recruitment sector.
