Many medium and large size businesses operating in the private sector will now be well underway with their preparations for the significant changes to the IR35 rules that are finally due to take effect in April of this year, following last year’s proposed start date being postponed as a result of the Coronavirus pandemic (yes, you read that right – it’s just over 5 weeks away!).
Under the new rules, responsibility for assessing the employment status for tax purposes of contractors (who provide their services though their own intermediary), and operating PAYE if appropriate, will shift from the intermediary to the end user business. The reforms were originally due to take effect in April 2020 but were postponed for 12 months because of the economic impact of the COVID-19 pandemic.
Whist the delay was welcomed with a sigh of relief by many, the changes to the IR35 rules are now fast approaching once again and businesses will need to ensure that they are ready to implement the new regime ahead of 6 April 2021.
Set out below are some critical pointers that you may wish to consider at this stage:
- Have you mapped out your contractor population to identify those that potentially fall within the new regime (that is, those contractors who are using their own company to supply services to you)?
While the IR35 rules only apply to arrangements involving an intermediary, it is sensible to check all off-payroll arrangements to ensure that you have no unexpected tax or NICs liabilities.
- Have you reviewed your existing arrangements with your contractors to ensure that they are robust and sufficiently protect you as a business?
Consideration should be given to the issue of the contractor’s status for both tax and employment rights purposes and the parties’ understanding should be documented in the agreement. We would also recommend that comprehensive tax warranties and indemnities are included in your contracts, as well as a clause that enables you to make deductions from the agreed fee in event that the contractor is deemed to be inside of IR35 if you engage with the intermediary directly.
- Have you set up a process for assessing contractors’ employment status for tax purposes?
It is advisable to nominate a person or department within the business to carry out all assessments to ensure consistency. Under the new rules, you will be required to set out in a “status determination statement” (SDS) both the outcome of the review and the reasons for the outcome. This must be provided to both the entity that you contract with and the contractor personally. If there is a chain of intermediaries (i.e. if there is a UK agency in the chain) each will be responsible for providing a copy of the SDS to the entity it contracts with and it will be essential to keep a copy of this for record keeping purposes in the event of any later queries or disputes with HMRC.
- Have you set up a process for responding to challenges that you receive to the outcome of any SDS?
Under the new rules, the contractor or deemed employer (such as an agency) can challenge the accuracy of a SDS and you will need to review your decision and respond with reasons within 45 days.
- Have you decided what to do about any contractors that fall inside of IR35 or how to engage with contractors (providing their services to you through their own company) more generally in view of the changes?
Although classification of a contractor as an employee for tax purposes will not confer any employee rights on the contractor (this would be for an employment tribunal to decide), it is important to bear in mind that the tests used to determine status in both jurisdictions are very similar. It is also now very clear following the Supreme Court’s decision in Uber that a tribunal will carefully examine the reality of the relationship between the parties when considering employment status, and not be bound by what the documentation states. Therefore, if a contractor is deemed to be inside of IR35, consideration ought to be given as to whether the contractor is genuinely self-employed. If not, this could result in you carrying significant risks of contractors seeking to avail themselves of “worker” rights such as holiday pay (similar to those that will now be borne by Uber following last week’s decision).
If you need help and guidance on the introduction of IR35 in the private sector, please contact our designated Employment & HR Services team.