Written by Kyle Barford, Product Manager (Tax)
Due to the COVID-19 pandemic, the government recently announced a 12 month delay to the implementation of a set of changes to the off-payroll working rules known as “IR35”. The new rules are now due to come in on 6th April 2021.
Overview of rule changes
The IR35 rules apply where a worker provides services to a client via an intermediary company (PSC or “Personal Service Company”) and that worker would be considered an employee if they worked for the client directly.
From 6th April 2021, the responsibility for determining whether IR35 applies has been moved from the intermediary (or contractor) company, to the end client or recipient of the services rendered. “Small” end clients are exempt from the rules, where “small” is based on definitions in the Companies Act 2006.
PSCs working for “small” end clients are still responsible for determining whether IR35 applies to themselves.
Under the historic treatment, responsibility for “self-assessing” under IR35 falling on intermediary companies effectively means the worker themselves has to make that determination. Many intermediary companies are set up by workers on the advice of their end client or because of industry standards or other similar reasons. As a result it is generally thought that there are a large number of contractors who have never assessed their status under IR35. HMRC seem to believe that shifting this responsibility on to end clients will improve compliance.
HMRC provide the CEST (Check Employment Status for Tax) tool to indicate how they are likely to assess a worker’s employment status in specific situations. However, due to the largely non-statutory nature of the IR35 rules, decisions on employment status are a matter of facts and circumstances and the CEST tool cannot always make a clear determination. Even after updates in December 2019 many practitioners remain critical of the tool for complex or borderline situations.
Rules changes in practice
For 6th April 2021, companies need to take the following steps:
- Check their eligibility for the “small company” exemption under the new IR35 rules. Companies must provide information on their size if an agency or worker asks them for it, so it may be prudent to draw up a standard response template.
Non-exempt companies will need to take the following steps:
- For services provided on or after 6th April 2021, identify whether the contractor is a PSC
- For each PSC, carry out an employment status determination and create a written “Status Determination Statement” to provide this determination to the worker (or agency), along with an explanation or why that determination was reached.
- Establish arrangements to deal with disputes from PSCs about the above status determination. There is a statutory obligation to respond in writing to such disputes with the outcome of any review within 45 days of the dispute being raised.
Where a non-exempt company is making payments to a PSC and the IR35 rules apply, the company is a “deemed employer” of the worker and is responsible for deducting tax and National Insurance from fees paid to the worker. The tax and NI deducted must be paid directly to HMRC.
This is quite an onerous additional compliance burden for companies. Many respondents to the government consultation on IR35 earlier in the year have raised particular concerns over the level of investment the changes will cause them to have to make to complete the status determinations, and the additional risks associated with the determination and dispute process.
Impact of delay
The delay to the implementation of this rule change has been widely welcomed by the industry due to the impact of COVID-19 on home working, as well as the tremendous disruption the pandemic and lockdowns have caused to normal business activities.
The Coronavirus Job Retention Scheme is being rightly prioritised by the government at this challenging time: a scheme which payroll and finance teams, and the accounting and tax advisory professions, have had to understand and advise on at extraordinary short notice.
However, HMRC are keen to stress that this is only a delay and that the rules coming in are as was previously planned. The delay at least gives companies more time to train and understand the rules, and put the appropriate processes in place.
We hope that the next year gives HMRC some more time to improve on the opinions generated by the CEST tool and to provide more guidance in this contentious area.
*These are the opinions of CaseWare Product Managers to provide information and insight to our products and should not be considered as a replacement to statutory guidance.