A year later than planned, changes to off-payroll working rules in the private sector will kick in from Tuesday 6 April 2021.
The rules, more commonly known as IR35, relate to people who provide services through intermediaries, such as their own limited company, and the way their employment status is determined for tax purposes.
Where it was previously up to the intermediary to decide the worker's employment status, that responsibility will lie with the medium or large business engaging their services.
The underlying legislation for IR35 is nothing new - it's been around for about two decades now.
It was implemented as a way of preventing a type of tax avoidance known as "disguised employment".
This is where a worker operates in essentially the same way as an employee would, but does so through an intermediary so they and the employer can avoid paying higher amounts of tax and National Insurance.
To tackle this, IR35 uses a series of legal tests to determine whether someone is genuinely self-employed or not. For instance, the tests look at how much control they have over their work, whether they would be able to send a substitute worker in their place, and whether they and their client are mutually obliged to complete and provide work.
If, in HMRC's eyes, the worker is an employee, the client will need to ensure the correct income tax and National Insurance is deducted from their pay.
In recent years, HMRC has planned to further clamp down on off-payroll working by making clients of workers, rather than intermediaries, responsible for determining employment status.
This change was first rolled out for public-sector organisations in 2017, then it was announced it would apply in the private sector from 6 April 2020. This planned date was then postponed for a year due to the coronavirus pandemic.
Although its main aim is to prevent tax avoidance, IR35 has been met with criticism since it was first implemented. Business and contractor groups have argued the rules are complex and unclear, and that they unfairly target legitimate contractors.
The Association of Independent Professionals and the Self-Employed (IPSE), one of the legislation's most vocal critics, does not think clients will be able to make an accurate determination and will be inclined to take a more risk-averse approach. This could mean applying IR35 whenever they are in doubt about a contract, or ruling out hiring contractors at all.
A recent IPSE survey suggested that 50% of freelancers are planning to stop contracting in the UK after the changes take place, unless they can get contracts that aren't affected.
Almost a quarter (24%) of businesses said they were planning to blanket assess all their contractors as ‘inside IR35', and 21% will only engage those working through umbrella companies.
What you need to do
If your private-sector business works with contractors or freelancers who operate through an intermediary, you'll become responsible for assessing each of their contracts to check their employment status from 6 April 2021.
Small businesses are exempt from the change, however, and can continue operating as before with the worker's intermediary deciding their employment status.
Your business is classed as small if it meets at least two of the following conditions:
- It has an annual turnover of no more than £10.2m
- It has a balance sheet total of no more than £5.1m
- It has fewer than 50 employees.
If you haven't already, you can use HMRC's check employment status for tax (CEST) tool to indicate whether IR35 applies.
HMRC has said it will take a ‘light-touch' approach to implementing the rules for the first 12 months, as long as you're doing your best to comply with IR35 you shouldn't face any penalties in the first year.
Contact us to talk about IR35.