Update: IR35 extended to private sector from 6 April 2021

What is changing?

Under current (pre-6 April 2021) rules, private sector businesses have been able to engage third party contractors through personal service companies (PSCs) or other intermediary entities without paying too much attention to the contractor’s status for tax purposes. The contractor is responsible for assessing whether IR35 applies and consequently whether to operate PAYE and National Insurance contributions (NICs) on fees received.

The reforms, initially announced in the 2018 Budget, arose as a result of HMRC’s concerns that private businesses were not complying with the rules as they were envisaged. The changes affect medium and large-size private sector organisations and shift the responsibility of determining a contractor’s status from the PSC to the end-client business. Where they conclude that IR35 applies, the end-client becomes responsible for operating PAYE and deducting employee NICs on the fees paid to the PSC (excluding VAT, if applicable). The end-client must also pay employer NIC’s on the sums paid.

The changes apply to any payments made on or after 6 April 2021, unless all of the contractor’s work was provided before that date.

What are the key considerations for affected businesses?

As ‘end-client’ recipient of the services the large/medium sized private sector business must, in respect of each engagement:

1. Assess whether the contractor is employed or self-employed for tax purposes;
2. Issue a status determination statement (SDS) to the contractor before the first payment date falling on or after 6 April 2021 and periodically thereafter. Where there is a UK agency in the chain (between the PSC and the end-user), the SDS must be provided to the agency and the contractor; and
3. Implement a procedure to enable the contractor and/or agency to dispute the SDS determination.

In general, the IR35 rules will apply where the individual contractor would be an employee of the end-client for tax purposes but for the existence of the intermediary company/PSC. This involves a careful consideration of several factors including the levels of control exercised by the end-user, the contractor’s right of substitution, any mutuality of obligation on the parties and other factors.

HMRC have provided some assistance to end-client businesses navigating these complex legal factors through their online Check Employment Status for Tax “CEST” tool and its accompanying guidance. Whilst end-clients are not obliged to use the CEST tool, HMRC have said that they will stand by the outcome produced by the tool provided that the end-client has entered the information accurately and provided that it is used in accordance with their guidance.

It is important that affected businesses provide the SDS to the appropriate entities as the arrangement will be deemed to be employment (falling inside IR35) where this is not carried out or where a determination is not carried out with “reasonable care”. Additionally, HMRC can charge penalties for non or under payment of tax where it is considered to be due.

MC comment

The proposed changes have not been welcomed by end-clients and contractors alike, not least due to flaws in the CEST tool which was criticised in a House of Lords report as falling “well short of what is required” and given that many businesses now face the “heavy burden” of determining the status of their contractors based on a complex and fact-specific test. It remains to be seen how effective CEST is and how the rules will be policed by HMRC in the long-term.

If you have any queries about IR35, please get in touch with your usual Memery Crystal contact or our employment team.