New UK tax rules come into force in April 2021 for UK employers who engage UK-based consultants and contractors.
The legislation called IR35.
WHAT IS IR35
Inland Revenue 35 (IR35) is a UK tax regulation which relates to off-payroll working rules. It has been in force since the year 2000.
IR35 is essentially an employment status test for tax purposes. Its role is to assess whether a Contractor is a genuine Contractor or a merely a ‘disguised’ employee.
Contractors who work through their own UK Limited Company enjoy certain tax efficiencies. While they don’t receive employee benefits such as PTO or Sick Pay), they do have a high degree of flexibility and control over their work.
Some Contractors and their Clients have taken advantage of this tax efficiency by working as if they were self-employed, when in reality, they were employees, in all but name.
WHAT IS CHANGING IN APRIL 2021?
Large and medium sized private sector business will be responsible for determining their Contractors’ employment / IR35 status. Hitherto, this responsibility rested with the Contractor.
Effectively, it is the end-client who will now be responsible for determining whether an assignment is inside or outside of IR35 rules.
The end-client must confirm the IR35 status of an assignment by providing a ‘Status Determination Statement’ (SDS). The SDS must be provided in writing to the worker. The SDS must be provided before the assignment commences.
The end-client must confirm the IR35 status of an assignment by providing a ‘Status Determination Statement’ (SDS). The SDS must be provided in writing to the worker. The SDS must be provided before the assignment commences.
‘Small’ businesses are exempt from the new IR35 obligations, if they meet two of the following criteria, for two consecutive financial years: annual turnover of less than £10.2 million; balance sheet of less than £5.1 million; 50 employees or less.
However, where a business is part of a Group, the small business test must be applied to the Group as a whole i.e., aggregate turnover and balance sheet and total number of employees across the Group as a whole. Therefore, the Company Group structure should be fully understood to ensure all Group elements are included when calculating whether the small business test conditions are being met.
DETERMINING IR35 STATUS
Whether IR35 applies to a Contractor is determined by the employment status of the person providing their services and off-payroll rules apply, if the contractor would effectively be an employee, if there was no “intermediary” between the Contractor and the Client.
The intermediary in most cases is the contractor’s Limited Company (known as a Personal Service Company – PSC – for IR35 purposes).
For added complexity, there is no legal definition of the term Personal Service Company but the guiding principle is that PSC’s are Limited Companies usually setup to deliver services from one individual and that individual is very often the Company’s only shareholder and Director.
HMRC has designed the IR35 legislation to make sure that Contractors working through their PSC are not doing so as ‘disguised’ employees and that they are genuinely self-employed; are taking on the risks of running a business and; are providing their services on a project-by-project basis.
IR35 does not apply to sole traders because sole traders are individuals without a company and they are already responsible for paying Income Tax and National Insurance through the Self-Assessment process.
PENALTIES FOR NON-COMPLIANCE
HMRC says that Companies will “not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there’s evidence of deliberate non-compliance”.
It says its first aim is be to support businesses trying to do the right thing by attempting to comply with the law.
However, after the 12-month soft-landing period, if it is found that a contractor has been incorrectly categorised as being outside of IR35, HMRC can issue a determination requiring the unpaid employee tax and National Insurance Contribution liabilities, plus any late payment fines and interest to be paid by the hiring company. Penalties can range from 0-100% of the initial outstanding liability.
IR35 COMPLIANCE CHECKLIST
Clients who engage consultants or contractors must validate their contractor’s status under and number of key HMRC criteria. These include;
- Client Control over Contractor
- Client Supervision of Contractor
- Ability for Contractor to provide a Substitute
- Mutuality of Obligation
- Degree of Financial Risk being taken by Contractor
- Payment Structure and Frequency of Contractor Payments
- Contract Exclusivity
- Non-Cash benefits provided to Contractor
For further details and guidance on IR35, please contact us.