Changes to off-payroll working (IR35) rules effective from April 2021 - 10/12/2020
The changes to off-payroll working (IR35) rules for the private sector continue to be delayed. The latest announcement from the government on 17th March 2020 of a 12-month delay as a result of the COVID-19 pandemic indicates that the new rules are due to be implemented from 6th April 2021.
When implemented, the new rules will have a significant impact on contractors working through a Personal Service Company, Recruitment Agencies, all large and medium-sized end-clients in the private sector and all organisations in the public sector.
Until the new rules are implemented, PSCs operating in the private sector will remain responsible for assessing the IR35 status of their assignments. Regardless of the position in the private sector, in the public sector, it will continue to be the responsibility of the end-client to determine the IR35 status of an assignment.
While businesses may perceive a respite from the new rules, all parties involved in a labour supply chain will need to ensure they remain IR35 compliant.
Our IR35 Navigator Tool gives contractors a free, accurate IR35 assessment of any assignment. We also offer the option to purchase a detailed report breaking down the areas of risk and giving recommendations on actions you could take to change your status.
What was the outcome of the recent review of IR35 by the government?
On 7th February 2020, HMRC published some minor changes to the off-payroll working rules, It is unclear how these changes will be addressed when the new rules are finally implemented. HMRC did announce the following:
- Customers will not have to pay penalties for errors relating to off-payroll assignments in the first year, except in cases of deliberate non-compliance
- Information resulting from the changes will not be used to open new investigations into PSCs unless there is reason to suspect fraud or criminal behaviour
- The new rules will only apply to services carried out from the date the new rules are implemented (expected to be 6th April 2021)
- The government will place a legal obligation on clients to respond to a request for information about their size from an agency or worker
HMRC also said that if an end-client is based wholly overseas, with no UK presence, then the new rules do not apply.
As highlighted above, we will not know whether these changes will be implemented until early in 2021.
Until the changes come in for the private sector it’s important that contractors assess the IR35 status of their assignments correctly in order to ensure they pay the correct tax.
Summary of changes to IR35for the private sector
We’ve summarised the main changes and impacts below. Our IR35 Hub has all the help and support you need to understand IR35 and how it affects you. We’ve also produced an article on “Getting your contractor business ready for IR35 in the private sector“.
The end-client will be responsible for determining whether an assignment is inside or outside of IR35 rules
The changes for the private sector mean the end-client will be responsible for determining the IR35 status of an assignment with a Personal Service Company (PSC). The rules will be consistent with the changes brought in for the public sector in April 2017.
Small business exemption to new IR35 rules
The new rules apply to ‘medium or large’ sized businesses in the private sector and all organisations in the public sector. There’s an exemption for end-clients who are ‘small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:
- Annual turnover is no more than £10.2 million
- Balance sheet total is no more than £5.1 million
- No more than 50 employees.
Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of an assignment remains with the PSC and the new rules do not apply.
The government has included clauses in the legislation to ensure medium or large-sized businesses do not set-up arm’s length companies or subsidiaries to procure services from PSCs. The legislation will apply to the parent company based on the aggregate amount of turnover and the aggregate amount of the balance sheet total of the connected entities.
There’s no small business exemption for public sector organisations and the legislation will apply to all end-clients engaging PSC workers in the public sector.
IR35 Status Determination Statement (SDS)
Once the changes are brought in (which will be April 2021 at the earliest) the end-client must confirm the IR35 status of an assignment by providing a ‘Status Determination Statement’ (SDS). The SDS must be provided in writing to the PSC worker and, if an agency is involved in the labour supply chain, a copy must be provided to the agency responsible for paying the PSC. The SDS must be provided to all parties before the assignment commences.
These arrangements place most of the responsibility for administering an SDS on the end-client and/or the fee payer (if an agency is involved).
IR35 status dispute resolution process is led by the end-client
It’s the responsibility of the end-client to establish arrangements to consider any disputes from PSCs about the SDS. The legislation does not specify how such arrangements should work in practice but does state a time limit of 45 days to respond, in writing, to the PSC with the outcome of the review of the dispute.
The decision must either confirm the original SDS is upheld, or, if it involves a revised SDS or conclusion, a new SDS must be provided in line with the arrangements outlined above.
Transfer of employment tax liabilities to another relevant person
The legislation is designed to ensure the organisation with responsibility for issuing the SDS, or the fee-payer if an Agency is involved, is responsible for any employment tax liabilities arising.
The legislation also allows HMRC to recover tax liabilities from another ‘relevant person’. A relevant person is any party involved in the payment to a PSC. This means HMRC can recover tax from the highest party in the labour supply chain which is not complying with the legislation. HMRC believes this will ensure compliance with the rules across all parties involved in the labour supply chain.
5% administration allowance withdrawn (mostly)
The new rules, when they are introduced, will remove the 5% allowance for PSCs to meet the costs of administering the off-payroll working rules. The allowance will continue for PSCs working with ‘small’ end-clients in the private sector as defined above.
Check of Employment Status Tool (CEST)
The government updated the Check of Employment Status Tool (CEST) in November 2019. Even after these changes, though there are still a number of concerns about the accuracy of the tool.
Crunch has produced our own IR35 Calculator tool which takes into account all the factors that could affect your IR35 status, producing more detailed results than CEST. The tool can be used by contractors to get a free IR35 status assessment. We also offer a detailed report outlining all the areas of risk for IR35 which can be purchased for just £49.50 +VAT.
Conclusion – The new IR35 rules will still cause issues but the delay is welcome
Crunch responded to the government’s consultation earlier in the year. It’s disappointing that most of the issues raised by us, and other responders, have been largely ignored in the final legislation. Of particular concern remains the:
- errors and inconsistencies contained in the government’s online Check of Employment Status Tool (CEST)
- additional investment required to complete an employment status determination by an end-client on a contract by contract basis
- removal of the 5% allowance for PSCs to administer off-payroll working rules
- risks to PSCs from the dispute resolution process which are the responsibility of the end-client to administer.
Does the length of the contract affect the IR35 status of an assignment?
The length of the contract is a factor but it must be considered in the context of the overall assignment.
A long contract may be acceptable for a complex project where the specialist input of a contractor is required, and where the contractor’s skills are scarce and not available to the end-client. However, a long contract, maybe covering maternity leave in an organisation may be viewed as simply a replacement for an employee, and the nature of the assignment would be one of an employee.
Many shorter contracts for different clients – overlapping at times – could be a good indicator that the PSC operates outside IR35.
When will deductions for employment taxes start?
The new rules take effect on 6th April 2021. If you have worked on an assignment before 6th April, and the assignment is inside IR35, then the fee payer (agency) or the end-client is responsible for deducting employment taxes even if the work was done before the new rules came in and the date of receiving payment is on or after 6th April 2021.
Who makes the deductions for employment taxes after 6th April 2021?
If an assignment is inside IR35 and you work directly for an end-client, then after 6th April 2021 the end-client will deduct income tax and employee National Insurance Contributions (NIC) from your gross payment. The end-client will pay the employer NIC.
If an agency is involved, and the agency is the fee-payer (ie. the entity which actually pays you), the agency will deduct income tax and employee National Insurance Contributions (NIC) from your gross payment. The agency will pay the employer NIC.
If your limited company works for a ‘small’ end-client then your limited company is responsible for income tax, employee NIC and employer NIC (ie. there is no change to the current rules).
You don’t have a choice over whether to be ‘employed’ or not. It is the end-client’s responsibility to determine your employment status based on its review of your assignment.
If an assignment is outside IR35 then employment taxes are not required to be paid, your PSC should receive the payment gross from the end-client or agency, and your company will account for these in your Corporation Tax return – with any personal tax paid through your company payroll or your annual Self Assessment as usual.
When you mention an ‘agency would pay the fees’, would YunoJuno count?
YunoJuno would be acting as the agency in this instance, so if the assignment is inside IR35, YunoJuno will deduct employment taxes. YunoJuno has published their own answer to this question on their website.
What happens if I have an overseas client?
This is a complex area and you need to discuss how your overseas end-client (regardless of location) is implementing the new regulations.
Update – March 2020 – The government has confirmed that the new rules will not apply if the client is wholly based overseas with no UK presence. If they do have a UK office or premises the rules will apply after April 2021.
HMRC guidance suggests the overseas end-client will need to provide a Status Determination Statement. IR35 applies when you pay your taxes in the UK.
What is a labour supply chain and does the size of entity at each stage make a difference to issuing a Status Determination Statement?
Once the new rules are implemented, the end-client, regardless of the number of entities in the labour supply chain, will always be responsible for issuing the SDS and passing it to the next party in the chain. It is the size of the end-client, and not the agencies in the labour supply chain, which determines whether an SDS should be prepared (‘small’ organisations are exempt from the new rules).
A simple labour supply chain would be an end-client engaging a personal service company (PSC) directly – the end-client prepares the SDS and passes it to the worker operating via the PSC.
If an agency is involved, the end-client passes the SDS to the agency which is then responsible for passing it to the worker operating via the PSC – the agency does not prepare the SDS.
If more than one agency is involved, the end-client will pass the SDS to agency 1, who will pass it to agency 2 who will then pass it to the worker operating via a PSC.
If any party in the labour supply chain fails to pass on the SDS, they become responsible for employment taxes.
The end-client may decide to pass the SDS to agencies and the worker at the same time.
Are SDS legally required to be published when mandated to go PAYE?
If the assignment is offered as a PAYE employed assignment, there is no need for an SDS as IR35 does not apply because you are being employed as an individual rather than through your limited company.
What about timesheets?
Your end-client may ask for a timesheet to be submitted by a worker personally. If this is for a fixed number of hours per week, and payment is made to you personally, this may indicate the assignment is one of employment.
If you do submit a timesheet because the end-client needs to calculate payments to your limited company, it’s important that any payment received is in the name of your company and you have invoiced in the name of your company.
What does inside and outside IR35 mean?
If you’re inside IR35, the relationship between you and your end-client is one of employment and employment taxes are due. If you are outside IR35, you are a self-employed worker and no employment taxes are deducted at source.
If a computer consultancy is running a project for a client of theirs, and they enter into a contract with my PSC, who is the “end client” – the consultancy (who my PSC has the contract with), or *their* end client?
It depends on the nature of the computer consultancy. If the computer consultancy is not an agency (that is, they are actually delivering the work outsourced to them by using your PSC), then the end client for your PSC will be the computer consultancy. If the computer consultancy is only an agency (recruitment company) delivering workers including PSC to their end client, then the PSC’s end-client will be the end-client of the computer consultancy.
Is the legislation retrospective?
IR35 legislation hasn’t changed – HMRC has introduced new rules about the party who should determine the IR35 status of an assignment.
HMRC has said it won’t look to investigate the application of IR35 rules by PSCs retrospectively unless there is evidence of fraud or criminal behaviour. However, it remains to be seen the position HMRC may ultimately take.
What’s the situation re Housing Associations and Charities?
There is no blanket answer to this question. It depends on how the individual body is constituted. HMRC says ‘companies owned or controlled by the public sector’ are public sector bodies for the purposes of IR35.
You should check with your end-client whether they are controlled by the public sector.
Will my rates go up if I am inside IR35?
A review of the impact of the new rules for IR35 in the public sector showed about 25% of contractors were able to negotiate an increase in their day rate. Amounts varied.
If you wish to preserve your net income, you should look to increase your day rate by about 20% if possible.
Should I keep my limited company open?
There is no blanket answer to this question.
Your company may have high accumulated profits you are looking to preserve for the future.
If you work on assignments inside IR35 and outside IR35, and you have different revenue streams into your company then it’s worthwhile keeping your company trading.
You should step back and think about your company’s potential for growth and expansion over the medium term before making a decision on continuing to trade or not.
What if I don’t have an SDS by April 2021?
An end-client or agency should not be deducting any employment taxes without issuing an SDS. It’s important you discuss your employment status with these parties well in advance of April 2021.
IR35 legislation requires an SDS to be prepared and provided to a worker by ‘medium’ and ‘large’ sized organisations, and always for public sector organisations.
How will I know if my end-client is ‘small’?
You will need to discuss with your end-client directly. They should confirm the following:
- Turnover of less than £10.2 million
- Total balance sheet less than £5.1 million
- Less than 50 employees
If two of these criteria apply, then it is a ‘small’ organisation.
The new rules specifically prohibit the use of smaller subsidiaries to manage contractors to avoid implementation – it is always the ultimate end-client used to assess the size of an organisation.
What’s happening with the CEST (Check Employment Status Tool) from HMRC?
The CEST tool is due to be updated by the end of 2019. HMRC recognises it does not currently deal with the Mutuality of Obligation test as comprehensively as it should. The output from the tool has been presented as evidence at recent HMRC Tribunals.
Will this affect my Self Assessment?
If you’re registered to submit a Self Assessment then you must continue to do so. Your IR35 income will be ‘income from employment’ in your tax return.
What is financial risk?
If your company is at risk of non-payment by an end-client then the company is carrying a degree of financial risk.
What about substitution?
If your contract states you can send a substitute then this is an indicator the assignment is outside IR35. However, the decision by your company to send a suitably qualified substitute should not be able to be vetoed by the end-client. If your company has previously sent, or your end-client previously accepted a substitute, that is also an indicator the assignment is outside of IR35.
If your PSC only offers your services then this can be a sign that the assignment is inside IR35, you could consider whether you are able to have an agreement with another PSC or contractor to cover each other when necessary.
What is an Umbrella Company?
Many agencies use an Umbrella company to process the payroll for the contractors they place with end-clients. The contractor becomes an employee of the Umbrella company under PAYE arrangements. The Umbrella company deducts all employment taxes and pays these over to HMRC. You usually pay a fee per timesheet processed by the Umbrella company.
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