IR35 – Dull but definitive. Ignore at your peril...

Claire Vane
April 22, 2021

if you use contractors / interims...

The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees. These rules are sometimes known as ‘IR35’.

So, changes to the regulations in relation to IR35 are now here -  from the 6th April 2021. Originally introduced to address potential tax avoidance issues, what is now happening is that the responsibility for determining tax liability lies with the employer or organisation to whom services are being contracted.

Now organisations have to provide an assessment of the true nature of the services delivered through a Personal Services Company (PSC). What needs to happen is that a decision needs to be made as to whether the PSC is providing services, or, if the relationship between service provider and organisation is more like that of an employee and should therefore be liable for tax and National Insurance (NI) just like any other employee.  From the 6th April, 2021, this responsibility moves from the PSC to the end-using client for all private companies (the public sector has already been legislated for some time ago). The only exclusions will be small organisations with a turnover of less than £10.2 million, balance sheet assets of no more than £5.1 million and no more than 50 employees.

In the case of small companies, as above, the current arrangements and the responsibility for determining the status of a contract and payment of associated taxes remains with the contractor.

So, what does this mean for the ‘non-small’ end clients?  

  • Each end client will now be responsible for assessing each new, extended or changed PSC contract that will be delivered and paid for post 6th April 2021.

  • For each PSC contract, there needs to be a written ‘Status Determination Statement’ (SDS) to confirm if the contract is ‘outside IR35’ – i.e. a true provision of services in which case gross fees can be invoiced. If it is ‘inside IR35’ the contract is deemed to be liable for full tax and National Insurance contributions in the same way as for a permanent employee.

  • For the latter, the end client needs to ensure that tax and National Insurance contributions are deducted from contract fees before payment of the contractor. In addition, any employer National Insurance and associated liabilities are also paid.

Despite the responsibility lying with the end client, organisations can outsource the payment process using a third party payroller, often termed ‘umbrella companies’.

The umbrella company will take the payment from the end client, deduct and pay employers NI, and any other necessary employer deductions (e.g. Apprenticeship levy), employees’ NI and employee personal tax.

Nota Bene: day rates for those who fall inside or outside IR35 need to be differentiated.  End clients will find that, based on a standard day rate, their costs go up by at least 13.8% (employer NI contributions). Contractors who fall into IR35 will find income reduced by circa 30% as a result of tax and NI deductions.  Both sides may well feel they are losing out.

The HMRC state that ‘reasonable care’ must be taken in undertaking the SDS.  It is in the best interest of the end client to ensure that there is accuracy and due process. The HMRC have declared that those not complying with the rules can result in the end client paying the full liability of Employer NI, Employee NI, Employee Tax, penalties and interest.

There is a possibility that this goes into the ‘much too difficult to handle’ pile but this will not go away. There are four key steps that need to be taken.

  • Review your contracts both current and potential, to determine whether they are delivered through a PSC and whether they fall into, or outside IR35.

  • Establish a set of rates for ‘inside’ IR35 and ‘outside’ IR35 and understand the commercial impact on both parties – the organisation and the contractors.

  • Consider how you wish to undertake the payroll obligations.

  • Talk to existing PSC contractors about your intentions.

We are not attempting here to deal with the detail but can help you with drafting and communication. A good overview of requirements in further detail can be found here. Please get in touch if you would like help. Getting this wrong is likely to be costly.

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