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IR35 (also known as the off-payroll rules) was introduced in 2000 to ensure that someone working like an employee, but through an intermediary, pays similar taxes to other employees. Changes were implemented in the public sector in 2017 and these are now being extended to the private sector with effect from 6 April 2021.
There are four key gateway tests that must apply for an engagement to be within the scope of the new rules.
The revised rules will not apply if you are a client that is a “small company”. A company is classed as small for a tax year if it satisfies two or more of the following requirements:
An individual worker must personally perform or be under an obligation personally to perform services for you as a client. Essentially where you have an outsourced contract these rules may not be relevant.
The services must be provided not under a contract directly between the client and the worker, but under arrangements involving a third party (the intermediary). That intermediary can be a limited company, partnership or another individual. In the case of either a partnership or a limited company, the contractor must own those legal entities in a specific way.
This test receives the most attention and can be the most problematic. Essentially, contractors must operate like your employee. In evaluating whether this test is met, you will need to take into account the key employment status tests like control, mutuality of obligation and personal service, together with other relevant factors.
Under the current rules contractors have a responsibility for assessing their own status and accounting for any tax where IR35 applies. If you are a “small” company then this should continue to happen and will have no impact on you.
However, from 6 April 2021, if you are a large or medium-sized company then you will be required to:
Finally, where you pay an intermediary directly and IR35 applies, you will need to account for income tax and national insurance (including employer NICs) on any fees paid to that intermediary. This will represent an additional cost for you in terms of employer national insurance at a rate of 13.8%. It will also require some degree of payroll management and information gathering.
If you’re contracting with an agency, you’ll need to understand exactly who is being supplied and be mindful of their obligations to account for income tax or NICs as the “fee payer” where IR35 applies.
Ultimately, the risk is an unexpected tax liability (most likely employer NICs), but possibly also penalties and interest. Such liability can arise where:
You can offer contractors a full-time position, although we would normally expect this to have evolved out of an agreed strategy within your business. Offering full-time permanent employment comes with its own associated costs.
There has been a wide variety of approaches in the market. We have seen some businesses implementing an absolute ban on contractors using their own intermediaries. Some have confirmed that they will no longer contract directly with intermediaries but only through agencies. Others have required that some or all contractors move to an umbrella company arrangement.
In all cases, businesses have been updating their strategy, process documents and internal communications to ensure that they can comply with their obligations under IR35. Some have a dedicated project team which consists of HR, payroll, procurement and finance.
Of course, this represents a significant change for contractors. However, I do not think that it will result in the end of contracting. There are still roles within businesses that require genuinely self-employed contractors with specific expertise and skills.
However, businesses will need to consider how they engage contractors going forward and whether their processes and use of contractors need to change.
The proposed implementation of the new rules was deferred last year. However, the legislation adopting the changes to income tax legislation received Royal Assent in July 2020 and the specific implementation date is 6 April 2021.
Whilst we know that a few parts of the legislation will be subject to further clarificatory amendment as part of the Finance Bill 2021, all of the communications from the government have said that the 6 April 2021 date will not change and businesses should proceed on that basis.
It’s hard to know this for sure. People with transferable skills who can work in other countries could look elsewhere, but I think we’ll have to wait until the rules are more bedded in to see the impact.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.
26 January 2021