IR35 – deferred, not defunct!
As we entered 2020, one of the key topics on our agenda was the IR35 Off Payroll Private Sector Reforms.
The intermediaries legislation, as it is also known, had seen some controversial reforms already introduced to the public sector back in 2017. These reforms were due to make their arrival in the private sector on the 6th of April 2020.
However, as a result of the COVID pandemic and resultant lockdown measures, the Government made the decision to defer the reforms until the 6th April 2021.
Whilst the decision to defer was a great relief to many, we now find ourselves only six months away from the implementation of the reforms.
For those hoping that the legislation would be scrapped or forgotten, the reality is that the legislation is already law, although not yet enforced.
Barring any extraordinary legal or political development, the changes will take effect on the 6th of April 2021.
What is IR35? Let’s recap
IR35, also known as the Intermediaries Legislation, is tax legislation aimed at tackling tax avoidance.
The legislation is designed to test whether workers providing their services and expertise to a client via an intermediary, such as a limited company, would otherwise be an employee of the client if the intermediary did not exist.
If caught by the IR35 legislation, the earnings of “deemed employees”, as they are referred to by HMRC, are subject to income tax and National Insurance Contributions (NIC’s).
What are the IR35 reforms?
It is currently the responsibility of the worker to determine whether their assignment is caught by IR35. The worker is also responsible for paying the correct taxes dependent on their IR35 status.
The reforms, scheduled to take effect in the private sector from 6th April 2021, will see the following key changes:
- Shift the responsibility of IR35 determination from the worker to the engager (the company utilising the worker).
- If caught by IR35, the responsibility for the payment of income tax and NICs will also shift from the worker to the fee payer (the organisation paying the worker for their services). This could be the engager or an agency (if the worker is supplied in this manner).
Does IR35 affect my business?
If your business utilises workers who provide their services via their own limited company, either directly or via an agency, then the IR35 legislation may apply to you.
There is an exemption for small businesses who meet any two of the following three criteria:
- Turnover – not more than £10.2 million.
- Balance sheet total – not more than £5.1 million.
- Number of employees – no more than 50.
Where a worker is engaged by a small business, the responsibility for determining the IR35 status, along with the payment of taxes will remain with the worker.
What should you do if IR35 applies to your business?
If your business engages workers and is not classified as a small business you will need to prepare for your new responsibilities once the reforms take effect.
The key change that you must prepare for is your new responsibility for determining the IR35 status. The legislation states that, as the engager, you must take reasonable care in how you go about making the determination.
Once you have made the determination, you will also be responsible for communicating the results of your determination to the next party in the supply chain. This must be done in the form of a Status Determination Statement (SDS).
What does reasonable care mean?
By reasonable care, HMRC means that you must conduct a thorough and detailed assessment of the work to be carried out by the worker.
This assessment must include the working conditions and terms under which the service is to be provided.
HMRC recommends that you:
- Formalise and record a consistent Status Determination process which is regularly reviewed to ensure fitness for purpose.
- Seek the advice and/or assistance of a qualified, professional advisor such as the Workr Group.
- Involve people with a good understanding of the work to be conducted in the determination process.
- HMRC recommends the use of its Check Employment Status for Tax (CEST) test although this is not mandatory. There are a number of excellent alternative tools capable of producing robust and accurate determinations. It is highly recommended that you utilise a status determination test tool wherever possible. Such tools simplify the determination process and promote consistency across tests.
- Ensure that determinations are regularly reviewed to ensure continued accuracy and validity.
- Ensure that new status determinations are conducted after any material changes to terms or working conditions.
- Define and communicate a clear process for challenges against determinations.
What are the risks of not taking reasonable care?
Once the engager has issued the SDS to the fee payer, all responsibilities then pass to the fee payer.
HMRC will always approach the fee payer in the first instance when conducting an investigation with regard to whether reasonable care has been met. However, any recourse could lead HMRC to the engager.
Where the engager is deemed not to have taken reasonable care in determining the IR35 status of a worker, HMRC can transfer any debt for unpaid taxes to the engager.
The same can be said for if the engager fails to respond to any challenge made by the worker against the determination.
It is vitally important, therefore to follow the guidelines above to ensure that reasonable care is taken during the determination process.
Debts can also be transferred where the fee payer simply does not pay taxes due to HMRC.
Where there is a chain of providers (MSP’s and agencies) involved in the supply of flexible workers, engagers must ensure that they conduct rigorous and regular due diligence checks of its supply chain in order to minimise its transfer of debt risk.
We have a specialist team at Workr Group that can support you with all aspects of compliance with IR35 and your flexible workforce.