IR35: Everything you need to know about the off-payroll working rules

With new rules and regulations set to be introduced around off-payroll working, also known as IR35, for the private sector in April 2021, many people are still unaware of their legal obligations.

We will look at the upcoming changes, focusing on how they will affect contractors and intermediaries, as well as what the obligations will be for employers.

What is changing?

From 6 April 2021, new off-payroll working rules will come into effect in the private sector. These changes were due to be rolled out in April 2020 but were delayed to allow businesses to deal with the economic impact of the coronavirus pandemic.

As well as employers, the legislation is primarily aimed at contractors who work through a personal service company (PSC), but could also cover partnerships, managed service companies or contractors working under another person.

Under the new rules, all medium and large-sized private sector end clients will be responsible for determining a contractor’s employment status, as opposed to the current rules, where workers decide on their own employment status.

The reforms have been introduced following reports that certain workers using PSC’s were paying less tax, even though they were working as if they were employed by the client, and their relationship is more akin to that of an employee-employer arrangement. This is sometimes known as “disguised employment”.

As the new rules place the burden of responsibility for determining the employment status on the engager of a contractors’ services, businesses should be prepared to implement the necessary controls well before the legislation comes into effect in April.

What do businesses need to know?

As the engager of a contractor working through a PSC, it will be your responsibility to determine if they are paying the correct amount of tax.

From April, employers are required to provide an employment status determination for every worker that you agree a contract with. The official guidelines are as follows:

  • Pass your determination and the reasons for the determination to the worker and the person or organisation that you agree a contract with
  • Make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
  • Have processes in place to deal with any disagreements that arise from your determination

If the determination results in a contractor being within the IR35 rules, you will need to deduct and pay tax and National Insurance contributions to HM Revenue & Customs via PAYE.

Where an employer fails to correctly identify a disguised employment scheme, the employer becomes liable for the worker’s tax and National Insurance Contributions.

Where you hire a contractor via an agency it is the responsibility of the closest intermediary to the PSC to calculate, deduct, and pay tax via PAYE on the contractor’s remuneration.

To assist with determining the correct employment status, businesses can use the Check Employment Status for Tax (CEST) tool, found here.

This tool has undergone a number of changes since its launch, but businesses should be aware that under certain circumstances it may not provide the correct determination, which is why seeking expert advice is crucial.

Soft landing period

The Chancellor, Rishi Sunak, has also offered reassurance to contractors that HMRC will ensure a soft landing is in place for the first twelve months following the implementation of the new IR35 rules. This means that HMRC will not impose strict penalties on businesses that breach the rules during the first year, allowing firms to adjust to the new requirements.

Exemptions

The new off-payroll working rules only apply to medium and large employers. According to the Companies Act 2006, a business is defined as ‘medium’ or ‘large’ if it meets two of the following criteria:

  • The company has a turnover of £10.2 million or more
  • The company has a balance sheet total of £5.1 million or more
  • The company has 50 employees or more

For help and advice with the new off-payroll working rules, contact our expert team at Milsted Langdon today.

Posted in Blog.