IR35 advice for Employers

Does your business use contract workers who provide their services via personal service companies (PSC) or other intermediaries? If you do, you need to know about the implications of the changes coming to IR35 on 6th April 2021.

For an overview of IR35 click here.

What changes for the Employer?

The main change coming on 6th April 2021 is that the responsibility for determining whether a worker is inside or outside IR35 legislation will shift from the worker’s intermediary (PSC) to the end client (or engager).

The new rules do not change the consequence of IR35; workers deemed inside IR35 will still need to pay the same tax and national insurance contributions as anyone classed as a direct employee.

What happens if an Employer doesn't understand or ignores the new IR35 rules?

From April 2020, all public sector authorities and medium and large-sized private sector clients will be responsible for deciding whether IR35 applies. If the client either 1) fails to make a status determination, 2) fails to pass the status determination down the supply chain, or 3) fails to take reasonable care when making the status determination; the client will be liable for the tax and NICs as the deemed “fee-payer”.

Agencies are advised to engage with their supply chains (clients and contractors) regarding the new rules to help to ensure that all parties are prepared for April 2020. It is important that clients exercise reasonable care when making a status determination, given the issues that arose from the public sector reform in April 2017 as a result of blanket “inside IR35” determinations.

If agencies are engaging with a small private sector client, they will be exempt, and they are not required to follow the new IR35 rules. The contractor’s PSC will remain responsible for determining their IR35 status and making the appropriate tax deductions and NICs.

How do you determine IR35 Status?

When a worker falls outside IR35, they are deemed to be in a genuine business of their own. They would not be affected by IR35 legislation.

When a worker is deemed as inside IR35, they could be classed as a 'disguised employee' (HMRC Term), and the IR35 legislation states that they must pay the same tax and national insurance contributions as PAYE employees.

HMRC has developed and built an online tool called CEST to help contractors and end-users assess tax status. This tool has proven controversial (And at one point didn't work), several other determination products can be used to provide a determination online.

Employment Solutions are working with our clients to ensure that all of our contractors are informed of this process. These changes will be for existing contractors and future contractors working as of April 6th, 2021.

There are a series of tests that can be used to determine IR35 status you can view these by clicking here

What happens if HMRC determine the worker as inside IR35 and the end-user doesn't?

If HMRC investigates a worker, they will look not just at the contract, but at the actual working relationship between the worker and end-client to help them ascertain if the rules apply.

Suppose after April 6th 2021 HMRC deems a worker to be non-compliant with IR35 rules. In that case, they will look to recover any tax and national insurance contributions owed, plus interest and potentially any penalties that may be due, from the client or the supply chain.

If the end client pays contractors directly, acting as both end client and as the fee payer, they will take on the full financial risk in the event of non-compliance.

This dual risk situation can be avoided by paying contractors via an agency such as Employment Solutions; this would then mitigate this financial risk for your business in the event of a dispute or non-compliance.

What happens if the agency and the employer do not agree on a status determination?

The draft legislation imposes an obligation on the client to provide a “client-led status disagreement process”, either the recruiter or the contractor may disagree and follow the process. The client must respond to a request to review the status determination statement within 45 days.

The client must either confirm that the determination is correct, with reasons or provide a new status determination statement reaching a different conclusion and withdraw the previous one. If you disagree with the client’s determination, the agency will need to write to the client and give reasons why. The recruiter will need to ensure they keep records of status determinations and any corresponding disagreements. During the dispute process, the client’s status determination stands

Is anyone exempt?

The new IR35 changes will affect all public sector clients and medium and large private sector clients only – “small” private sector businesses are exempt. The definition of “small” is based on the s382 Companies Act 2006 definition.

The existing off-payroll working rules will continue to apply for assignments if the client is a “small” business, meaning the responsibility and liability for making the status determination and deducting the appropriate taxes and NICs remains with the PSC.

A company qualifies as “small” if two of the following conditions apply:

Their turnover does not exceed £10.2 million
Their balance sheet total is no more than £5.1 million
They have less than 50 employees

HMRC’s review, published on 27 February, confirmed that the final legislation will include a legal obligation on the clients to confirm their size when asked by an agency or a worker.

Does it apply to Employers based outside of the UK using UK based contract workers?

IR35 applies where the worker is operating through a UK limited company, irrespective of the location of work. HMRC’s review, published on 27 February, clarifies the position on overseas clients. Where the client is based wholly overseas, with no subsidiary or presence in the UK, the new off-payroll working rules will not apply, and the obligation to determine tax status falls back on to the contractor’s limited company

What are the options if the worker falls inside IR35?

If an assignment is determined as “inside IR35”, there are various alternative engagement models to an off-payroll model:

PAYE payroll (agency workers) - Where a recruitment company contracts directly with the worker and operates tax and NICs under agency rules and provides the workers with worker rights, IR35 off-payroll rules do not apply. If you do decide to engage workers directly, AWR applies and the Swedish derogation will be abolished in April 2020.

Umbrella Company - Where an umbrella company employs the worker directly, the off-payroll working rules do not apply. Some umbrella companies do not employ the worker directly and use intermediaries, so ensure that this is checked as you may unwittingly enter into a PSC contract where the off-payroll working rules will apply.

“Inside IR35” PSC – Should you wish to continue to engage a contractor who is deemed “inside IR35” via their PSC, you will need to calculate a ”deemed employment payment” using the RTI (Real Time Information) payroll system. The deemed employment pay rate is the income of the worker after deductions, including both employee and employer NICs and the Apprenticeship Levy. Neither worker rights nor stakeholder pension rights apply.

Can you make a blanket determination?

One of the biggest issues to arise from the public sector reform in April 2017 was blanket “inside IR35” determinations. This resulted in a large number of contractors being moved into umbrella arrangements. It became clear that such a blanket assessment would not meet the statutory obligation to take reasonable care when making an IR35 status determination. Clients can take a role-based approach if they have a number of contractors working on the same contract on similar terms and conditions.

Employment Solutions And IR35

Employment Solutions has worked hard to ensure that we have a process in place ready for the changes to go live on April 6th 2021 so that all of our PSC workers remain compliant.

Looking for advice on IR35?

Whether you are the end client engaging with contract workers, or a contract worker providing your services through a PSC, Employment Solutions can help. If you would like to discuss IR35 and how you think it may affect your business, please get in touch today. You can call us on 0161 839 5353 or fill out the form below.