IR35 was introduced by HMRC to allow it to collect additional payments of income tax and National Insurance. Postponed from April last year due to the pandemic, the new rules will now come into force on 6 April this year.
Where a contractor is operating through an intermediary, such as a limited company (often also called a ‘personal service company’) and but for that intermediary they would ordinarily be regarded as an employee of their client, IR35 applies to make the intermediary liable for the payment of income tax and NI, including employers NI, in respect of the payments made to the contractor.
From 6 April this year the client, rather than the intermediary, will be responsible for taking and paying over to HMRC any tax and NI due in respect of the contractor before paying the intermediary for their work where IR35 applies. This has operated in the public sector since 2017 and is being extended to the private sector from 6 April.
Do the new rules apply to you?
These new IR35 rules will apply to all private companies unless they fall with the ‘small company’ exemption. A ‘small company’ is defined as one that meets at least two of the following:
- an annual turnover no more than £10.2 million
- a balance sheet no more than £5.1 million
- an average over a year of no more than 50 employees
There is also an exemption for un-incorporated organisations, such as partnerships. These are exempt from the new rules if their annual turnover is less than £10.2 million.
What to do next if you are not exempt
If you are a client in an arrangement involving a contractor operating through an intermediary or ‘personal service company’ you are required to determine the status of the contractor. As the client you will retain the responsibility for paying any tax and NI due until you have done this.
You should carry out an assessment as to whether the contractor is likely to be deemed an employee taking into account all the circumstances of the project or assignment they are being required to undertake for you as the client. Having done this you are required to issue a ‘status determination statement’ to the contractor and the intermediary setting out your findings. There is a duty to take reasonable care in the preparation of that statement and you will then have 45 days to respond to any representations from the contractor or the intermediary in response to it. Failure to comply with this process will leave you as the client responsible for paying any tax and NI that may be due to HMRC.
If the client you are dealing with is an agency rather than the intermediary then you will still be required to carry out the status determination but the agency will be responsible for the payment of any tax and NI through PAYE if IR35 applies.
How to decide on the status of the contractor
There are a number of recognised tests which assist in determining the status of a contractor and whether they are likely to be regarded as an employee rather than truly self-employed through the intermediary/personal service company. Factors to take into account when assessing someone are:
- Control – what degree of control do you have over the contractor, the more control the more likely they are to be regarded as an employee
- Substitution – can the contractor substitute someone else to do their work? If not this makes them more likely to have employee status
- Financial Risk – if the contractor has financial risk when entering into the contract or has their own insurance this points away from them being an employee
- Integration – if the contractor is part of the organisation, for example has their own email address and uses company equipment this points towards them having employee status.
HMRC also have an online tool, CEST, which assists clients and intermediaries in determining whether IR35 applies or not. That said, although HMRC has said it will be bound by the outcome of any determination reached using CEST, the online system has come under criticism and is due to be enhanced at some stage.
It is worth noting that having a written agreement in place with the intermediary which states that the contractor is not to be regarded as an employee for the project or assignment will not mean that you no longer have to consider the various tests; it is how the arrangement works in practice that is relevant.
The contractor can also challenge your assessment and there needs to be a clear procedure in place for doing this.
HMRC has also issued a Briefing Paper aimed at supporting those businesses who are affected by the new rules.
6 Practical steps to take next
- Look at the current arrangements and contracting terms in place for all contractors.
- Decide on the process you will follow to determine if IR35 applies. You may wish to take advice at this stage, even if you are also using CEST.
- Decide on how you will respond if IR35 applies. For example, will you take the contractors onto your payroll as employees? This will have implications in terms of their employment rights, including holiday pay and pension.
- Decide on how you will handle any challenges to your ‘status determination statement’.
- Keep a paper trail; it will be important to document the process you have followed in respect of each contractor, including where you might decide that IR35 does not in fact apply and the reasons for that.
- Take advice if you are unsure at any stage!
Please get in touch if you would like to discuss any questions you may have about IR35 and how to prepare for the new rules:
E: firstname.lastname@example.org / T: +44 (0)1252 821792