Private sector IR35 launches April 2021: why you should act now

Wednesday 20th January 2021

With final technical guidance on the changes to IR35 now published by HMRC, it looks likely that the changes will go ahead in April 2021 despite the challenges faced due to COVID-19. Mary Walker, partner in Employment law at Gordons, explains why now is the time for private sector businesses to prepare.

Representing the biggest change to employment taxation for decades, IR35 for the private sector will (for the first time) make large and medium sized businesses responsible for checking the tax status of independent contractors.

Designed to combat “disguised employment”, IR35 targets those employing and those delivering labour as an individual person through a Limited company, to only one end user: essentially making them an employee.

Current legislation (pre-April 2021), states that it is the responsibility of the contractor to assess whether IR35 applies to their working style, and if so, operate PAYE and National Insurance Contributions (NICs) on the fees their Limited Company receives (excluding VAT and certain statutory deductions).

IR35 is a result of growing concerns from HMRC that the tax efficiency of working for one’s self through a Limited Company has meant fewer independent service providers, known as intermediaries in the technical guidance, have come forward in admitting their “disguised employment”. By placing the onus on the end-user, a more compliant approach is expected, resulting in increased and lawful payment of tax and national insurance.

Why now is the time to act

Large and medium sized businesses will need to assess whether their independent contractors fall within IR35 legislation for services provided after the 6th April 2021 and will become responsible for paying the required PAYE and NICs.

This is not a quick process and requires due care and attention to ensure compliance. It could affect your business functioning too, and you may need to find alternative contractors, or work with your existing providers to bring their tax status in line with the new legislation.

Under the new IR35 ruling, the end-user must assess whether the independent contractor is employed or self employed for tax purposes, confirming its assessment along with substantial reasoning in a Status Determination Statement (SDS).

This must be handed to the contractor, plus the agency they work through if applicable, before the payment of their first invoice. It is reasonable to assume that contractors will want to know before becoming involved in a project whether or not they will be assessed for IR35 compliance – and they have the right to dispute your assessment if they feel it does not accurately represent their business set up.

Again, this will take time, and with only a few short months before the legislation comes into force as we enter 2021, now is the time to begin status determination assessments on existing independent contractors.

Clear technical guidance has now been released by HMRC to enable those affected to get to work, including a detailed checklist of how you can determine who falls within IR35 and needs to be treated as an employee.

There are three key principles. The first is concerned with supervision, direction and control and questions whether the service provider is required to work at prescribed times like an employee. The second considers substitution and how viable it would be for the service provider to bring in another person to complete the work. The final principle is called mutuality of obligation and questions whether there is an obligation on the employer to offer work and whether the contractor must accept it. These are all signs that the contractor is essentially an employee.

There are a number of other factors too, including whether the contractor uses their own equipment, whether they are paid on a project basis or monthly and whether they work exclusively for one end user.

Who is affected?

Small, private sector companies will be exempt from the new rules and will not be responsible for the IR35 compliance of their independent contractors.

The legislation applies to large and medium sized businesses who meet two of the following three criteria: an annual turnover of more than £10.2 million, a balance sheet total of more than £5.1 million or having more than 50 employees.

As for the contractors, IR35 only concerns individuals working as a Limited Company, or private service company. It does not affect those registered as sole traders. The rules apply to those providing labour and not outsourced services and there are exemptions for those registered or supplying personal services outside of the UK.

Make no mistake, IR35 is undoubtedly the biggest change we have seen in decades to the way employers pay tax and becoming compliant is no overnight fix. There are only a few short months to ensure compliance before the commencement date of April 6th 2021, so reading the guidance in full and speaking to individual contractors now would be prudent action.

For further information or advice on IR35, please contact Mary.