Preparation and changes from 6 April 2021
From 6 April 2021 the Government has made changes to the IR35 tax regime, designed to prevent tax-avoidance of contractors by the use of an intermediary company (usually a personal service company, or “PSC”). In simple terms, the regime makes sure that workers who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees.
Reforms to the IR35 regime mean that large and medium-sized private sector businesses are now required to do an assessment in relation to the employment status for tax purposes of the contractors working for them through PSCs or other intermediaries as opposed to leaving it up to the intermediary. This assessment consists of establishing whether the contractor is genuinely self-employed or “deemed employed” for tax purposes. If contractors are considered to be “deemed employed” then the business engaging them is required to operate PAYE and deduct income tax and National Insurance contributions from the amount paid to the intermediary.
In preparation for the IR35 reforms, many businesses will have already taken steps in order to comply with the new rules from 6 April. Such preparatory steps include:
Identify all off-payroll workers working in the business and create a list of those individuals;
- Identify all off-payroll workers working in the business and create a list of those individuals;
- Identify who is involved in the contractual chain to engage this individual, is there an intermediary or an agency?
- Identify the contractual arrangements between the business and all the parties in the chain (whether written in a contract or in unwritten working practices); and
- Conduct a Status Determination and form a view on the employment status of the individual performing the services for tax purposes taking into account factors such as control, the ability to provide a substitute, the obligation to provide or be provided with work, their integration into the business, where the financial risk lies and other factors which are taken into account by HMRC to determine tax status;
- Provide a Status Determination Statement (SDS) to the contractor (and agency, if applicable), confirming the status determination and the reasons for the determination before the first payment is made to the contractor. A SDS can be prepared using HMRC’s CEST tool, subject to the business exercising reasonable care;
- Where applicable, determine which party may need to make appropriate deductions in relation to payments to the contractor.
In practice, businesses should be prepared to answer questions from HMRC on their arrangements with all contractors and how they have reached their determination regarding tax status, not just those that are engaged through an intermediary and fall within the scope of IR35.
When a business has conducted all of the steps above and issued a SDS that is not the end of the process. The obligations on a business under IR35 are ongoing and businesses will need to regularly review their arrangements with their contractors to ensure they are compliant with IR35. We have listed below some of the major elements under IR35 which you will need to consider on an ongoing basis.
- Reasonable Care – you must take reasonable care in making a status determination. If you do not, the SDS will not be valid and your business will be treated as a “deemed employer” and responsible for PAYE on payments paid to the contractor in any event. HMRC has confirmed that what is considered “reasonable care” will vary between businesses however, it will include making status determinations on an individual basis (rather than applying the same determination to large groups of workers) accurately completing the CEST tool, applying HMRC guidance, seeking advice of a qualified, professional advisor and taking account of all relevant evidence (including information provided by the contractor). Other factors include reviews, training and maintaining a proper audit trail (see below).
- Dispute Resolution – you must have a dispute resolution process in place to deal with any disagreement between the contractor and the deemed employer. There is a minimum requirement set out in the IR35 legislation which includes considering the representations of the contractor and/or deemed employer, responding to those representations within 45 days, inform the worker and/or deemed employer that the representations have been considered and what the outcome is. Where necessary, a new SDS must be issued, taking reasonable care in making the new SDS.
- Audit trail – in the event HMRC investigated a business in relation to their SDS’s and contractor relationships, it is vital that you are able to demonstrate that your business has properly undertaken the procedure required under IR35 (and the off-payroll working rules in general). For example, have you reviewed all off-payroll working and identified the contractual relationships applicable? Have you come to a view on the tax status of each of the contractors? Are you able to provide reasons? Can you demonstrate that you do regular reviews of the law and contractual arrangements?
- Reviews – if there are material changes to the contractor’s terms and conditions or working practices, you should reconsider the original determination to see if it is still accurate and whether a new SDS needs to be issued. This would also apply where there is a change in law which may affect the original SDS. You should review the processes being applied in making the status determination and identify where mistakes may have been made in the past so these are not repeated in future determinations (e.g. misunderstanding a question on the CEST tool).
- Training – you should ensure that the person or team undertaking the status determination has a good understanding of the determination process and what is involved, possesses the knowledge required to complete the status determination, are provided with an appropriate level of support and training in relation to IR35. It is vital that the relevant individual or team are aware of any updates in tax law relating to employment status, much of which is currently subject to appeal, or any changes in HMRC guidance.
Any large or medium-sized business which engages contractors through an intermediary/PSC must be aware of the ongoing obligations it has to ensure compliance with IR35 and to mitigate the risk of being penalised by HMRC. The most important factor for all businesses is to ensure they are exercising reasonable care and following the proper process when creating and issuing SDS’s.
If you have any questions about employment status of contractors or the applicability of IR35 arrangements within your business, Taylor Walton’s Employment Law Team would be happy to assist you. Please contact Employment – Taylor Walton (workpr.co.uk)