What is the IR35? Will the upcoming changes affect my company?
You may or may not have heard of the IR35 rules. If you have heard of them, you are probably aware that there can be heavy penalties if your company is found to be in breach of them. This blog aims to explain what the IR35 is, and highlight whether your company is affected.
What is the IR35?
Introduced in 2000, the IR35 aims to tackle the misuse of Personal Service Companies (PSCs) for tax avoidance purposes.
The IR35 was announced in a government press release “Countering Avoidance in the Provision of Personal Services”. Also known as the “off-payroll working rules”, IR35 applies if a contractor provides their services through their own limited company to a client.
The effect of these rules ensures that any contractors (who would otherwise have been employees of the company) pay the equivalent rates of tax and National Insurance Contributions (NICs), as though they were employees.
The following parties need to be aware of their responsibilities under the IR35 rules:
- Contractors who provide their services through a PSC or other intermediary
- Clients who receive services from a contractor through their PSC or another intermediary
- Agencies who provide workers’ services through a PSC or other intermediary
If it’s found that the rules apply, tax and NICs must be deducted from the fees and paid to HMRC.
Changes to IR35
Changes are due to come into effect as of 6th April 2021.
The changes coming into force will mean that all public authorities, and medium and large size clients, will be responsible for deciding the employment status of workers. In effect, they will need to decide whether a contractor falls under IR35 or not.
The new rules will apply to all public sector clients, and private sector companies that meet at least two of the following conditions:
- An annual turnover of more than £10.2 million
- A balance sheet total of more than £5.1 million
- More than 50 employees
There is a simplified test in place where the only criteria is an annual turnover of more than £10.2 million. This simplified test applies to clients who are not any of the following:
- A company
- A limited liability partnership
- An unregistered company
- An overseas company
Further to this, if the parent of a group is considered “medium” or “large”, their subsidiaries will also have to apply the off-payroll working rules.
What do clients need to do under the new rules?
Under the new rules, clients will be required to determine the employment status of any of their contractors. In this case, employment status refers to whether a worker is employed or self-employed.
The decision on employment status should be made in regard to each and every contract agreed with the contractor, or agency worker. This should be communicated using a Status Determination Statement (SDS). The SDS must be passed to the contractor (and agency) and should contain the reasons for coming to a decision. You will also need to carry out the following duties:
- Keep detailed records of any employment status determinations, along with the reasons for them and any fees paid
- Put processes in place to deal with any disagreements that arise from employment status determinations
Small-sized clients in the private sector are not required to determine the employment status of their workers or contractors.
When making a determination, the “Check Employment Status for Tax” service can be used.
What if the contractor disagrees with a determination?
If a worker disagrees with the employment status of a client, the client must:
- Consider the reasons for the disagreement
- Decide whether determination is maintained if they think it is correct (and provide reasons why) or provide a new determination
- Keep a record of any determinations and the reasons for them, as well as records of any disagreements
- Confirm which date the determination is valid from
Note: A disagreement can only be raised by a contractor until the last payment is made for their services.
Clients must respond within 45 days of receiving a notification of disagreement regarding the employment status determination. They should continue to apply the rules in line with the original determination during this period.
Penalties for non-compliance with IR35
HMRC have the power to investigate the employment status of off-payroll workers in an organisation in the UK.
If HMRC determines that an individual has been incorrectly categorised by the end hirer, they will issue a determination which will require the unpaid PAYE tax and NICs. The hirer will also be required to pay any late payment fines and interest.
HMRC can issue a penalty ranging from 0% to 100% of the initial outstanding liability. This is based on the co-operation of the end hirer during the investigation, and how much care was taken in coming to a determination.