The following article is a summary of the changes to off-payroll working rules, sometimes known as "IR35".
What are the new off-payroll working rules (IR35)?
IR35 rules are designed to ensure that persons providing services directly to a client through their own limited company or other intermediary who may otherwise have done so as an employee are taxed in the same way as an employee (by paying income tax and national insurance).
When did the new laws come into effect?
From 6 April 2017 - Public authorities became responsible for deciding if the rules applied where they contracted workers who provide services through their own intermediary.
From 6 April 2021 - Medium and large-sized clients outside the public sector are responsible for deciding if the rules apply.
Who determines if a contract is inside IR35?
It is the responsibility of the end client to make the IR35 status assessment known as a "Status Determination Statement" or SDS. A copy of the SDS must be issued to all parties.
The governments CEST (check employment status for tax) tool can be used to help make the assessment, further information can be found here - www.gov.uk/guidance/check-employment-status-for-tax
There is an exemption for end clients who are ‘small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:
- Annual turnover is no more than £10.2 million
- Balance sheet total is no more than £5.1 million
- No more than 50 employees.
What happens if a contract is deemed as inside IR35?
The client must deduct PAYE (income tax and national insurance) from any payments to the contractor. PAYE is then paid by the client to HMRC on the contractors behalf.
What criteria are used to decide if the contract is within IR35?
Determinations can be complex as they are based on many years of employment case law.
However, HMRC have set out three main criteria of what type of contract would fall within IR35 rules, these are;
1. Control - does your client determine what the contractor does, and how, when and where the day to day work is completed?
2. Personal Service - is the contractor required to carry out the work personally, or can an alternative person be sent in place?
3. Mutuality of Obiligation - is the client obliged to offer the contractor work, is the contractor obliged to accept it?
Can a contractor dispute if a client determines that a contract is within IR35?
It is the responsibility of the client to establish arrangements to consider any disputes about the SDS.
The legislation does not specify how such arrangements should work in practice but does state a time limit of 45 days to respond, in writing with the outcome of the review of the dispute.
The decision must either confirm the original SDS is upheld, or, if it involves a revised SDS or conclusion, a new SDS must be provided in line with the arrangements outlined above.
How does IR35 apply to sole traders?
There has historically been an obligation on clients to determine the employment status of assignments carried out by a sole trader, IR35 does not alter this.
Employment taxes are not accounted for at source if a person is truly self-employed. Clients need to ensure that they correctly assess any roles they offer to sole traders and the working practices involved.
Outcome of recent government reviews of IR35.
On 7th February 2020, HMRC published some minor changes to the off-payroll working rules. This included the following;
- Customers will not have to pay penalties for errors relating to off-payroll assignments in the first year, except in cases of deliberate non-compliance.
- Information resulting from the changes will not be used to open new investigations into contractors unless there is reason to suspect fraud or criminal behaviour.
- The new rules will only apply to services carried out from 6th April 2021.
- The government will place a legal obligation on clients to respond to a request for information about their size from an agency or worker.
- If a client is based wholly overseas, with no UK presence, then the new rules do not apply.