What is happening and when?

What: Due to wide non-compliance with the IR35 rules, the government introduced reforms in the public sector in April 2017 – these are known as the “off-payroll rules”. The Chancellor announced at Budget on 29th October 2018 that the government will also reform the off-payroll working rules in the private sector. On 17th March 2020 the UK Government announced a 1-year delay to new IR35 Off-Payroll Working rules, in light of ongoing COVID-19 challenges and effects.

When: New changes will be implemented from 6 April 2021.

What’s the biggest change? From April 2021, that liability for assessing IR35 status is no longer on the contractor’s intermediary but on the client.

What’s the latest update? The reform to off-payroll working rules in the private sector to 06 April 2021, the latest version of the amendments to Chapters 8 and 10 of Part 2 of ITEPA 2003 were published in Schedule 1 of the Finance Act 2020 on 18 May 2020. Following agreement by both Houses on the text of the bill, the Finance Act 2020 received Royal Assent on 22 July 2020.

Here’s what you need to know:

What is IR35?

IR35 is the name given to tax legislation in the Income Tax Earnings and Pensions Act 2003 (ITEPA) and applies to individuals supplying their services through an intermediary, usually a PSC.

In simple terms, IR35 means that if the intermediary did not exist and the individual supplied looked like an employee of the end user client, then the individual should be subject to employee taxes and social contributions. This is commonly known as “inside IR35”. If IR35 applies, then the intermediary has to operate PAYE and National Insurance contributions on the contract rate.

Why has IR35 changed?

The IR35 rules were originally introduced in 2000 with the intention of ensuring that individuals who are working like employees but who operate via an intermediary, pay broadly the same tax and national insurance as an employee would. However, they were largely ineffective in HMRC’s opinion due to contractors self-assessing their own IR35 status.

  • HMRC determines that 1/3 of people working through their own company should fall within IR35 and be taxed as employees (but only 10% of this group think they should be taxed in that way).

  • HMRC estimates the cost of non-compliance in 2017/2018 at £700M and to increase to £1.2B in 2022/23.

When do the off-payroll working rules apply?

The off-payroll rules apply if a worker provides their services to a client through an intermediary (their personal service company (PSC)) but would be classed as an employee if they were contracted directly with the client. Before 6 April 2021, if the client is in the private sector, it’s the worker’s limited company’s responsibility to decide their own employment status for each assignment.

From 6 April 2021, how the rules are applied will change. All public sector authorities and medium and large-sized private sector clients with a UK connection will be responsible for determining whether or not the rules apply – i.e. is the worker “inside IR35” or “outside IR35”? Where the private sector client is considered “small” or has no UK connection, the worker’s limited company will remain responsible for deciding the contractor’s employment status and whether IR35 applies. Where off-payroll is applicable and the client makes the status determination as inside, the contractor’s fees will be subject to tax and National Insurance contributions.

Small company exemption

The new off-payroll rules will only affect medium and large private sector organisations with a UK connection and the public sector, so “small” private end clients are set to be exempt. Under section 382 of Companies Act 2006, a client qualifies as ”small” if two of the following conditions apply:

  1. Annual turnover Not more than £10.2 million

  2. Balance sheet total Not more than £5.1 million

  3. Number of employees Not more than 50 employees

​The existing off-payroll working rules will continue to apply for assignments if you are providing services to a client classed as a “small” company, meaning that the responsibility for making the status determination remains with the PSC.

Please note that the small company exemption applies to the end client, not the fee-payer or the PSC

What are the main changes?

Client determinations

Currently in the private sector the person providing services through their own PSC is responsible for deciding if the IR35 rules apply. As highlighted above, from April 2020 this responsibility for operating the off-payroll working rules will move from individual contractors to the end client organisation. This means that private sector end-clients (unless classed as a “small business” under the Companies Act 2006) will be required to provide a status determination statement including the decision as to whether the off-payroll rules apply (“inside IR35”) or do not apply (“outside IR35”) and “explain the reasons for that conclusion” to the first party in the contractual chain (ie the recruitment business/agency) and also to the worker directly.

There is not a time by which the client needs to provide the status determination statement (currently start date under the existing public sector rules). The rationale is the client must provide this statement and carries the liability of fee payer until it does so.

Where the client concludes that IR35 applies, the fee payer (which may be the end user themselves, a recruitment agency, or other third party paying the intermediary) will be responsible for accounting for and paying the related tax and NIC to HMRC, including the additional cost of Employer’s NIC.

The new rules aim to reduce the cost of non-compliance and make it easier for HMRC to monitor and enforce compliance in the future.

Client-led status disagreement process

The worker or the deemed employer (the fee payer) can make representations to the client that the conclusion mentioned in a status determination statement is incorrect.

The client has 45 days from the day the representations are received to either:

  • Inform the worker or (as the case may be) the deemed employer that the original conclusion is correct and provide reasons; or

  • Give the worker and the deemed employer a new status determination statement which contains a different conclusion and state that the previous status determinations statement is withdrawn.

If the client fails to comply then from the end of the period of 45 days the client is treated as the fee payer, with the accompanying liability to pay tax and NICs.

Assignments “Outside IR35”

When the client makes the status determination that an assignment is “outside IR35”, they must ensure that “reasonable care” was taken during the decision-making and that the decision itself is reasonable. If the client does not exercise reasonable care, the status determination statement will not be valid, and the client will be liable for the unpaid taxes.

For assignments found Outside IR35 by the client and supported by a valid status determination, the worker will be able to continue engaging with ersg via their PSC on a contract for services.

Assignments “Inside IR35” – How to engage with ersg going forward

For assignments found “Inside IR35” by the client, the options available to you are:

  • ersg PAYE payroll (agency workers) ersg contracts directly with the worker and operates tax and NI contributions under the agency rules and provides the workers with workers rights. As a result, the off-payroll working rules do not apply.

  • Inside IR35 PSC Deemed Employment Deductions – Should an individual wish to continue to engage with ersg via their PSC albeit the assignment being deemed “inside IR35”, ersg will calculate a “deemed employment payment” and pay the PSC accordingly. This ensures compliant deductions and reporting through HMRC RTI (Real Time Information) payroll system. The deemed employment pay rate is income after deductions, including both employee and employer NICs and the Apprenticeship Levy (only if applicable). ERSG does not charge any admin fees to the contractor for this service.

  • FCSA approved Umbrella Company Employment - Where an umbrella company employs a contractor as a worker directly, the off-payroll working rules do not apply. ersg formed strong partnerships with a small number of FCSA approved umbrella companies specifically chosen for their extensive involvement and experience with the roll-out of the off-payroll working rules in the public sector. Weekly fees will be applied by the umbrella but discounted rates have been negotiated for the benefit or ERSG workers, please contact us for an introduction to our partners.

  • Statement of Work engagement (SOW) – where possible depending on the specifics of the client project.

How is ersg preparing for the IR35 changes?

  • Our Legal and Compliance Team is keeping abreast of the latest developments by attending professional IR35 seminars and workshops.

  • We are also working closely with the REC, a professional body for recruitment businesses, which is keeping its members informed of any new developments on the off-payroll working rules in the private sector their meaning for the recruitment sector specifically.

  • We have formed an internal IR35 working group of senior managers from across all functions to create, implement and review strategy.

  • We are working with our clients to help them navigate through the changes and ensure that we understand their strategy and plan accordingly.

  • We are assessing our current contractor base to identify those likely to be impacted by the new rules.

  • We have rolled out a company-wide internal training on the new IR35 rules.

  • ersg’s Legal team has reviewed its PSL for compliance partners and formed strong partnerships with a small number of umbrella companies specifically chosen for their extensive involvement and experience with the roll-out of the off-payroll working rules in the public sector. We are holding continuous discussions with our compliance partners to provide our clients and contractors with the most cost-effective compliance solution.