Changes to IR35: is your organisation ready?

By Michael Williams of Knill James' Tax Department

The rules regarding off-payroll working, commonly known as IR35, are changing. From 6 April 2021, the rules, which were introduced in the public sector in 2017, will also apply for services provided by contractors to medium and large-sized private sector clients. This change will affect not only the contractors but also the organisations that hire them.

What are the off-payroll rules?

The off-payroll working rules relate to situations where an individual contractor provides services personally and would, if other entities in the supply chain were ignored, be considered an employee of their end client. Where the rules apply, the result is that amounts received for services provided are taxed as employment income rather than trading profits.

Why is it changing?

Previously, where a contractor provided services to their end client via their own intermediary - normally their own limited company known as a 'personal service company' or 'PSC' - it was effectively the responsibility of the contractor, via their PSC, to determine whether the IR35 rules applied. HMRC have perceived that compliance with these rules by contractors is historically very low, and in response amended the rules for public sector end clients a few years ago, giving them the responsibility to determine whether the rules should apply, instead of the PSCs.

This change to the rules - and transfer of responsibility - has now been extended to medium and large-sized private sector clients with effect from 6 April 2021.

What new responsibilities will organisations have?

All private sector clients who engage with contractors that operate via a PSC or other intermediary will need to establish whether or not these rules may apply to them. If they do, private sector clients, including third sector organisations such as some charities, must take steps to ensure they are ready.

Act now to avoid penalties

HMRC have stated that, as long as there is a reasonable attempt at compliance with the new rules, they will not seek to impose penalties for the first 12 months. But in order to rely on this protection, action must be taken now. HMRC has also said that, except in cases of suspected fraud or criminal behaviour, any information they receive as part of these new off-payroll working rules will not be used to open enquiries into IR35 compliance for earlier years.

Who undertakes the status determination?

The organisation that is the end client must determine the employment status of a working arrangement. This can be a very complex process and the time involved should not be underestimated. It is a requirement under the new rules that 'reasonable care' be taken when making a determination. What's more, it does not matter whether or not the contractor and their PSC come via an agency or other middleman in the supply chain; the end client will be responsible for making the status determination.

What happens if a contractor is determined to be an employee?

Should any contractor be found to be an employee under these new rules, there is likely to be an additional cost for Employer's National Insurance in the supply chain. There may well also be reduced net pay for the contractor which will affect cashflows throughout the chain. Pay As You Earn is also required to be operated before payment is made to the PSC, which will add to the administrative burden.

Deadlines and disagreements

Contractors affected by the rules should receive a notice from their end client or agency of what their employment status will be with effect from 6 April 2021 prior to receiving their first payment in the 2021/22 tax year. There is provision within the rules for contractors to put forward arguments against the status determination should they disagree with the conclusion reached, and end clients should ensure there is a process in place to deal with any disagreements.

How we can help

If you have any questions about how this might affect you or wish to discuss any aspect of the IR35 changes, please contact Michael Williams on 01273 484934 or email michaelw@knilljames.co.uk.