WHAT ARE THE IR35 RULES?
IR35, also known as the off-payroll working rules, is legislation designed to combat the avoidance or reduction of tax and National Insurance Contributions (NICs) by workers who ‘disguise their employment’, by delivering services to end user clients through third party intermediaries (usually, but not always, a personal service company controlled by the worker). In doing so, workers enjoyed the tax treatment afforded to contractors, in turn making their business more tax efficient, when in fact they were considered the equivalent to employees (or office holders) in all but name.
Under the IR35 regime (introduced by HMRC in 2000), the responsibility for determining the workers tax status rested with the intermediary. If the worker was deemed to be an employee, then the intermediary would tax them accordingly based on the fees received for their services. The problem with this however was that the worker was still effectively assessing their own tax status, resulting in further tax avoidance and non-compliance.
WHY ARE THE IR35 RULES CHANGING?
Unsurprisingly, in 2017, the Government removed the intermediary’s role within the process by amending two of the IR35 rules within the public sector. The first change was to shift the onus for determining the workers tax status onto the end user client. If the worker was considered to be an employee for tax purposes thereafter, the second implementation placed the obligation for operating payroll and deducting income tax and NICs on the fee payer in the contractual relationship, again typically the end user client.
Currently, within the private sector, the liability sits with the intermediary to assess whether the payments received for the workers services are caught under the IR35 rule. However, having been delayed for one year due to the impact of coronavirus, as of 6 April 2021, the private sector will operate under same rules applied in the public sector. This means that medium and large sized unincorporated and incorporated entities will now have the administrative burden of ascertaining a worker’s employment status for tax purposes, as opposed to the worker themselves. Small incorporated companies will be exempt from the new rules however provided they satisfy certain criteria over two consecutive financial years. In which case, the duty of defining employment status will fall back on to the worker.
Once the status determination has been made, the client must provide the worker and other parties involved in the contractual chain with a ‘Status Determination Statement’, giving their reasoning behind the decision. Failure to do so will impose all tax liabilities upon the client until their obligations have been fulfilled. Importantly, should the worker wish to contest the decision, the client must also develop and implement its own procedure to resolve disagreements surrounding status determination.
There are a variety of complex tests involved in determining whether an individual is an employee for tax purposes and reasonable care must be exercised by businesses when doing so. It is time to get ready now if you haven’t already and Law At Work can help you to prepare for the 2021 IR35 changes should you require any assistance.