NEW IR35 RULES 2021 – CONTRACTOR GUIDANCE
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:
Annual turnover Not more than £10.2 million
Balance sheet total Not more than £5.1 million
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?
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.
IR35 FAQs for Contractors
Do the new IR35 rules only apply to services performed after 6 April 2021?
The new rules will only apply to payments made for services provided on or after 6 April 2021.
Previously, the new rules would have applied to any payments made to the PSC on or after 6 April 2021 irrespective of when the services were performed or the invoices were raised.
Alexi provides his services to a medium - sized client from the 23 March 2021 to 17 April 2021. Alexi works eight hours a day, Monday to Friday and opera tes through a PSC. Alexi would be employed if engaged directly. There are ten working days before 6 April 2021 and ten working days on or after 6 April 2021. The payment for these services is £2,000, so £1,000 of this (10/20 days) is subject to Chapter 8, Part 2 ITEPA 2003 and the other £1,000 (10/20) is subject to the new rules.
If a contractor falls “inside IR35” from 6 April 2021 and starts paying tax and NIC, will this automatically trigger an enquiry into previous assignments?
HMRC have decided to only use information resulting from the new off-payroll rules to open any new compliance checks into the returns for earlier years if there is a reason to suspected fraudulent or criminal activity.
HMRC will focus on ensuring businesses comply with the reform for new engagements, rather than focusing on historic cases. Organisations’ decisions about whether workers are within the rules will not automatically trigger an enquiry into earlier years.
My client is based outside the UK, but is engaging a contractor who is a UK tax resident and operating through a UK limited company – does IR35 apply?
Where the medium and large-sized private sector client is based wholly overseas and has no UK connection in the form of being a UK resident or having a permanent establishment in the UK, the worker’s limited company (PSC) will remain responsible for deciding the contractor’s employment status and whether IR35 applies.
I work for lots of clients, does IR35 still apply?
The off-payroll working rules will still apply irrespective of how many clients and assignments a contractor is working on. There is the argument that if you are working on multiple projects for various clients, this will demonstrate that you are in business on your own account as an independent contractor, and therefore fall “outside IR35”. However, your IR35 status is assessed on an assignment basis – working for multiple clients is not a significant indicator of being in business on your own account; the IR35 status for each assignment is judged on its own merit.
Can I be involved in the client’s status determination?
It is expected that you will be involved to some degree in the client’s status determination process, as there are some questions in the HMRC CEST tool which require the contractor’s input – for example questions on how you run your business. However, there is no statutory right for a contractor to be consulted during the status determination process.
I do not agree with the client’s status determination, can I appeal it?
The legislation imposes an obligation on the client to provide a client-led status disagreement process. Each client will have their own process in place and workers will be able to follow the process to appeal the outcome of an SDS they disagree with.
The client has 45 days beginning with the date the client receives the appeal to respond. If it fails to meet that deadline then from that date on it carries fee payer liability until it complies. The client must either confirm the determination is correct, with reasons, or provide a new status determination statement reaching a different conclusion and withdraw the previous one.
Will my rate be affected by the new rules?
If your assignment falls “inside IR35”, the take-home pay will be less as the recruitment business has a statutory duty to deduct the appropriate tax and NICs.
Can I be forced to pay for employer’s NICs?
Recruitment businesses cannot lawfully deduct secondary NICs from an agreed fee, but recruitment businesses may have to adjust the contractor’s pay rate to factor in the additional costs of supply which include employers’ NICs. Depending on your contractual terms, there may be scope for the rate to be negotiated accordingly.
Do I get employment rights if I am “inside IR35”?
Should you wish to continue operating as an “inside IR35” contractor, you will not benefit from any “employee rights” such as holiday pay, sick pay, pension contributions, dismissal rights etc. You may receive these benefits through your employment in your PSC.
If your assignment falls “inside IR35”, it is likely that you are no longer in business on your own account and could be within scope of the Agency Worker Regulations (AWR). Under AWR, you are entitled to comparable pay to a permanent employee on the client site. If you opt to engage via an umbrella company, you are an employee of the umbrella company and therefore you will benefit from employment rights and AWR will apply.
My assignment is for 2 years – is it automatically “inside IR35”?
The 24-month rule is in reference to claiming travel expenses. This rule has no bearing on the IR35 status of an assignment.