The requirement for an individual working through their Limited Company, to make the assessment of whether they fall inside or outside of IR35 and deduct any PAYE/NIC, will transfer to the end client and fee payer from 6 April 2021.
These new rules will affect off payroll workers and those that contract them, with those providing consultancy services and IT services amongst those most likely to be affected.
What is important to note is that the IR35 assessment rules and the key principles that support these have not changed. It is only the responsibility to assess and apply the tax that has changed.
What is IR35?
IR35 is legislation to prevent disguised employment. If an individual is providing services through their Limited Company (often referred to as their ‘Personal Service Company’), that would be treated as employment but for the existence of their Company, then the IR35 legislation requires the contractor to deduct PAYE and NIC from payments made to their Company.
In essence, if HMRC were to remove the individuals Company and look at the direct relationship of the individual providing the services with the end client, could this be viewed as one of employment?
In such a case HMRC would review both the actual working practices of how the services are performed and the contract.
Key Principals and Factors to consider
The fundamental areas that would be considered when assessing the IR35 position are as follows:
- Supervision, direction and control over work
- Right of substitution
- Mutuality of obligation
- Use of equipment/provision of tools
- Financial risk
- Length of engagement
- Opportunity to profit
- Part and parcel
- Quality over quantity/ matter of fact
Who do the new rules apply to?
The change in responsibility applies to the end client and the fee payer, which in some cases may be the same entity and in other cases if for example, an agency is involved, they may be different entities. Understanding the chain of those involved is therefore very important.
There is an exemption if the end client is considered small for Corporation Tax purposes. In this case it is exempt from the responsibility. A company is small if it meets at least two of the following conditions:
- Annual Turnover not exceeding £10.2m
- Balance Sheet not exceeding £5.1m
- No more than 50 employees
What does this mean in terms of the new responsibilities?
End clients that engage the services are required to undertake the IR35 assessment before any payment is made to an individual operating through their Limited Company, for services provided post 6 April 2021.
The end client is required to provide the outcome of the assessment in the form of a Status Determination Statement, SDS. This must be passed on to the individual working through their Limited Company and Agency if there is another entity in the chain whom pays the contracting Company.
The SDS must state whether the individual is deemed to be an employee for tax purposes only and take reasonable care in doing so.
End clients must also put in place an appeals process to allow the individual operating through their Limited Company to appeal against any SDS assessment. After the appeal the end client must enact any appropriate changes to their decisions on the SDS and provide an updated SDS assessment within 45 days of the appeal being lodged.
What should a business affected by these new responsibilities do to prepare?
- Assess their workforce - Businesses who are the end engager need to understand their supply chains and understand their workforce, to identify those individuals engaged via a Limited Company.
- Make the assessments – With the appropriate application of the key principals and HMRC’s CEST tool, the business needs to evidence the status of each engaged Limited Company.
- Prepare Status Determination Statements - Provide these to those operating through Limited Companies by 6 April 2021 and pass these onto any agencies so they are able to apply tax correctly.
- Update company processes and training – It is very likely most businesses, as a result of these new responsibilities, will want to add additional processes to their existing procedures and ensure relevant departments and roles within the business receive the appropriate training to be able to deal with this.
Those businesses affected by the new responsibilities are advised to seek professional advice to ensure they understand their obligations. Whilst the Government has confirmed they will allow businesses a soft landing for the first 12 months, businesses still need to demonstrate they have made every effort to be compliant.
In addition, for those individuals operating through their own Limited Company, it is important they still take responsibility for understanding and assessing their IR35 status and if possible, understand the chain they sit within and if their end clients are impacted by these new responsibilities. That way if they receive SDS’s they will be prepared having already considered the position themselves and if their end clients are not impacted by the rules, then assessing their own position continues to be their responsibility.
A varied workforce in 2021
A final area of reflection is to highlight how businesses may benefit from assessing their workforce across the board and not just specific to those individuals operating through Limited Companies.
If a business has a workforce made up of a combination of employees, sole traders and individuals operating through their own Limited Companies, then it is important to note the responsibilities in assessing the employment status of the sole-traders and other HR obligations of employees. Whilst IR35 specifically relates to Limited Companies, (potentially partnerships), sole traders have always been and continue to be, the end client’s responsibility to assess their employment status and with the focus on Companies, this can get overlooked. The importance of this is highlighted even further with the recent Uber case whereby Uber drivers have successfully won rights entitling them to statutory pay and paid holidays. For legal purposes they are a worker, which is a half way house between an employee and sole trader. However, for tax purposes they are a sole-trader and therefore workers are not employees for tax purposes, but carry additional rights. Understanding this and the true cost of a business’s workforce, is now more critical than ever before.
We have recorded a special webinar on this subject to help support businesses with further information and guidance
We have also recorded a special edition of The Streets Sessions, our business podcast, on this topic