Revised IR35 rules to apply from 6 April 2021

Revised IR35 (off-payroll working) rules come into force in the UK from 6 April 2021 to align the rules applicable to contractors in both the public and private sectors.

Background to the IR35 rules

Introduced in 2000, the IR35 rules are designed to reduce tax avoidance by contractors who are supplying their services to clients through an intermediary, such as a limited company but who would be an employee of the client, absent the intermediary. If the IR35 rules apply, each contractor (HMRC refers them as “disguised employees”) would have to pay income tax and national insurance contributions (NICs) in the same way as employees. They are responsible for assessing their own IR35 status and it was the individual’s limited company or agency, i.e. the intermediary, who was responsible for accounting for any PAYE tax and NIC.

In 2017, the IR35 rules, which apply to the public sector, were revised. These revised IR35 rules shifted the responsibility for assessing whether the IR35 rules were correctly implemented from the intermediary to the public sector body engaging them. If so, the engager is liable for accounting for and paying over PAYE and NIC.

Finance Act 2020 is further expanding the application of the IR35 rules to the private sector thereby aligning the application of these rules with the public sector.

What are the revised IR35 rules?

From 6 April 2021, where a contractor (Worker) provides services personally through a personal service company or any other intermediary (Intermediary or Service Provider) to a large or medium sized business in the private sector, the entity receiving such services (Client or End User) will the responsible for determining whether or not the Worker should be regarded as an employee for the purposes of IR35. If so, the End User (or, if different, the entity paying the fees to the Intermediary) will be responsible for operating PAYE and NIC in respect of any fees or remuneration payable to the Intermediary for the services provided by the Worker, much in the same way as it would in respect of the remuneration of its employees.

To whom do the revised rules apply?

The rules apply to an End User where the End User is a company (or where the End User is a member of a group, the group) that meets at least two of the following conditions:

• an annual turnover of more than £10.2 million;
• has a balance sheet total (i.e. total assets on the balance sheet before deducting liabilities) of more than £5.1 million;
• has more than 50 employees.

A simplified test, based on an annual turnover more than £10.2 million applies to an End User which is an entity other than a company, an LLP, an unregistered company or an overseas company.

The obligations of an End User

Once it is established that the contract for the supply of services of the Worker to the Client (or End User) is through an Intermediary (or Service Provider), the responsibility for determining whether or not the IR35 rules apply lies with the Client or End User.

A key question is whether that Worker would have been considered an employee of the End User if the Worker had been engaged directly by the End User. If the answer to this question is in the affirmative, the Worker will be within the scope of the revised IR35 rules. End Users have a responsibility to take reasonable care when making their determination. End Users should make a determination for each any every contract for the supply of services by Workers. They cannot apply blanket determinations to all contracted workers, even if they decide that they should all be taxed as employees. To do so would carry the risk of a fine.

HMRC has provided an online check on employment status for tax (CEST), although there is no obligation to use this system. While the online CEST is helpful in straightforward cases, it does not provide definitive answers where the facts are complex.

As shown in the diagram above, having determined the Worker’s deemed employment status, the End User must issue a Status Determination Statement (SDS) to the Worker and the employment business that pays the Intermediary (fee payer), unless the End User is also the fee payer. In the SDS, the End User, must state whether or not the deemed employment status applies and give reasons for such determination. HMRC considers that if the CEST has been used, the legislative requirements for a valid SDS will have been met.

The End User will also need to ensure that detailed records of the employment status determinations, including the reasons for the determination and fees paid are kept and have processes in place to deal with any disagreements that arise from the determination.

Obligation to deduct PAYE

The End User will be required to deduct PAYE tax and NICs until such time that it issues the SDS to the Worker and the fee payer, if applicable.

Once the End User has issued the SDS and the Worker has been determined to be a deemed employee for the purpose of IR35, the responsibility for deducting income tax and NICs under PAYE, using Real Time Information reporting, lies with the fee-payer. If there is a chain of entities between the Client and the Intermediary, it is the lowest UK entity in the chain (that is, the one that pays the Intermediary) that must operate PAYE.

What do End Users need to do?

End Users should start preparing to accommodate these changes. Their preparation should include:

• assessing all existing contracts with Workers through Intermediaries which will continue after 5 April 2021 to determine their status for IR35 purposes
• catering for the additional administration required to comply with the new rules
• putting in place the necessary administrative machinery to determine the of status of Workers and new Workers
• issuing the relevant notices and SDSs.

For further information,  please contact JD Ghosh.

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