Blaser Mills Law: are you ready for changes to IR35?

 MIA member Blaser Mills Law have prepared the following article about IR35. 

The controversial reforms to the way contractors operate under IR35, known as the “off-payroll working rules (IR35)” are still on course to be introduced on 6 April 2021 following the deferral last April. Similar rules are already in place for contractors working in the public sector. These changes will extend the regime to the private sector. 

What are the changes?

IR35 is a very complicated area that has evolved over time. The basic premise of IR35 is that if the contractor works for their client like an employee but through their own limited company or other intermediary structures like an agency, the relationship is termed as “deemed employment” and the contractor should pay tax in a similar way as individuals who are employed directly. That tax is typically determined and paid by the contractor’s limited company. 

This will change from 6 April 2021, when it becomes the responsibility of the contractor’s own client to decide on the status of the relationship and deduct and pay the appropriate tax and national insurance, including employers’ contributions. The contractor will be required to provide information to the client to enable it to make the decision.

The client is required to provide the contractor with a ‘Status Determination Statement’ (known as an SDS) if the rules apply, setting out and explaining their decision. The client must also have a formal process that allows the contractor to challenge the decision. HMRc has produced an online tool called CEST to help businesses carry out the assessment. https://www.gov.uk/guidance/check-employment-status-for-tax 

Who do the new rules apply to?

The rules are designed to apply to large and medium sized clients who use contractors i.e not a small client. A client is not small if it satisfies at least 2 of the following criteria;

• It has more than 50 employees;
• It has a turnover of more than £10.2 million. In groups, parent companies need to be aggregated into this, even if they are overseas;
• A balance sheet of more than £5.1 million. 

The way the corporate vehicle the contractor uses is set up e.g their limited company can also have a bearing on the application of the rules. 

The client is a “small company” so IR35 does not apply to me? 

The new rules target large and medium sized companies but if the client is “small” the current IR35 rules will continue to apply meaning that the contractor’s limited company may still need to deduct and pay tax as though the relationship is one of “deemed employment”. 

For the tax year 2020 to 2021, your limited company or other intermediary will remain responsible for operating the off-payroll working rules and accounting for and paying the relevant Income Tax and NICs.

What should I do? 

This depends where you are in the chain. 

If you are the client, you need to check if the rules apply to you and if they do, you should audit your contractors because you will need to issue the SDS and have in place the SDS appeal procedure. Strictly this should be in place by 6 April and HMRC has made it clear that it will not accept “blanket statements”. If the tax obligation does fall on you, will need to put consider the recording and payments for the tax. Where there is a chain of intermediaries, it is possible to transfer the tax obligations further down the chain, depending on the structure. 

And, it will obviously be a cost to the business that you need to factor into your business model. 
If you want to ensure that your contractors are outside these new rules, you may need to modify how they work for you and the contractual arrangements you have in place. 

If you are an intermediary operating in the chain between the client and the contractor’s limited company, you need to prepare for the necessary information flows between the client and contractor to determine status and the risk that you may become responsible for the tax obligations with no ability to pass this on. Again, you should review your business model and contracts to determine how you will manage the risk and obligations. 

If you are the contractor operating through your own limited company or another intermediary, you will need to assess if the relationship you have with your client is “deemed employment” and be ready to provide your client with information so that it can issue the SDS. If you are in “deemed employment” then you should prepare to have deductions for tax from the pay you receive unless you can change the status of the relationship.  HMRC particularly looks at the level of “control” and “supervision” the client has over you, the level of “personal service” by you, the degree of integration into the client and who bears the risk if things go wrong. Getting this and your contracts right is very important. 

We have been working with clients in all parts of the chain and so we are well placed to help you prepare for and navigate these complex new rules.