IR35 will be back in focus again this year after its introduction in to the Private Sector was delayed to April 2021 due to COVID 19. For those of you who will benefit from a quick refresher here is a brief summary of the incoming law and the key points for you to be aware of in your preparations.
A brief introduction to IR35
Inland Revenue 35 Tax legislation known as IR35 was originally introduced to the public sector in April 2017 to tackle the problem of disguised employment. This is where a Limited Company is formed to carry out work that would normally be done by a permanent employee and in doing so pays less tax in relation to earnings received.
There are accounts of people leaving permanent jobs on a Friday just to be found at the same desk Monday morning at the same company carrying out the same work but as a Limited Company Contractor through their own Personal Services Company!
Under IR35 the “off payroll” rules are applied on an assignment-by-assignment basis to ensure that individual contractors are paying the correct amount of tax for each assignment.
What’s changing?
From April 2021 IR35 will become law in the Private Sector and it is the end user (the client) who will have to determine whether an assignment is considered INSIDE IR35 (subject to PAYE tax rules) or OUTSIDE of IR35 (business to business engagement). Previously this has been the contractor’s responsibility.
The end user will be required to decide whether the off-payroll rules apply and provide a Status Determination Statement (SDS) setting out its status decision and its reasons for the decision.
If a Limited Company Contractor is Inside IR35 from April 2021 their Income Tax and National Insurance Contributions will be deducted at source.
There are a couple of exemptions: -
You are not required to supply an SDS for PAYE temporary workers or for contractors working through an Umbrella company (advisably members of the Freelancer & Contractor Services Association (FCSA)).
Or if you are a “small business” (annual turnover less than £10m.2 per financial year, balance sheet turnover is no more than £5.1m per year and less than 50 employees).
Determining status
It is important that you take ‘reasonable care’ in determining the status otherwise it is not a valid SDS and you could be become liable for any unpaid tax and national insurance.
It is also important to understand that deciding whether a contractor is Inside or Outside of IR35 is nuanced and a judgment should be made by assessing the whole picture, it is not a tick box exercise.
There are several areas that a court of law would consider if HMRC pursued a Limited Company contractor with Direct Supervision & Control, Right of Substitution, Financial Risk and Mutuality of Obligation carrying the heaviest weight in determination.
The areas are: -
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Leans towards being INSIDE OF IR35 |
Leans towards being OUTSIDE OF IR35 |
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Under the direct control and supervision of the end client. The contractor is told how, what, when and where to work. |
The contractor is free to decide how, what, when and where they do the work. |
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Right of Substitution – The contractor is obliged to personally carry out the work. |
The contractor has an unfettered right to substitute the service to someone suitably qualified. |
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Length of contract – The contract is for a fixed term, temporary ongoing or on a rolling basis. |
The contract relates to a specific piece of work rather than length of time. |
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Tools & Equipment – The end client provides tools and equipment for the contractor. |
The contractor is responsible for providing their own tools and equipment. |
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Financial Risk – the contractor does not risk their own money or carry responsibility for the standard of work. |
The contractor risks their own money such as marketing, equipment or training. This also includes reduced payment for missed deadlines or poor standards of work. |
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Part & Parcel of the organisation – Rolling contract, appraisals, eligible for bonus, on the org chart, can use employee facilities/functions, business cards etc. |
Project based, has an end date, uses own equipment, treated as an independent contractor. |
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Mutuality of Obligation – The end client is obliged to keep offering work to the contractor and the contractor is obliged to accept. |
The end client has no obligation to offer work and the contractor has no obligation to accept. |
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Termination Clause – notice period. |
The ability of either party to terminate the contract without notice. |
The contractor can disagree with your SDS determination and request further information on how you reached it. You have an obligation to respond within 45 days to either confirm your decision and why or confirm that you have changed it, in which case you would withdraw the SDS and issue a new one.
If you are struggling to determine the SDS one option is to use the online government tool “Check employment status for tax” (CEST) and as long as the information is inputted accurately HMRC have stated that they will stand by any statuses calculated by the tool. CEST can be found at www.gov.uk/guidance/check-employment-status-for-tax This is not a legal requirement and other tools are also available.
In certain sectors some organisations have made “blanket decisions” stating that all contractors must be PAYE or work through an Umbrella. This will cost them access to the services of some very talented contractors who are genuinely working outside of IR35. For companies prepared to take the time to do this right (and for major companies who use a lot Ltd Company contractors it is quite a task) it is definitely worthwhile.
Assistance?
If you would like more information on how FPR Group can help you prepare for IR35 or if you have any questions about using Limited Company contractors please do not hesitate to reach out to me at [email protected]
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