Remember HMRC’s proposed changes to the IR35 tax rules? They were meant to come into force in April 2020 but were postponed for one year due to the coronavirus pandemic, so they may well have fallen off your radar! However, with April 2021 swiftly approaching, we answer some of your IR35 questions, providing a refresher on what the rules are and what exactly is changing.
Re-cap on IR35
IR35 are anti-avoidance tax rules designed to make sure that contractors providing their services to clients through an intermediary company (eg a Personal Services Company or PSC) are taxed properly if they are in fact ‘disguised’ employees.
Essentially, if the contractors work like employees of their clients rather than self-employed contractors, IR35 say that they should be taxed as employees too (eg by paying income tax and national insurance on their fees). IR35 are also called ‘off-payroll working rules’.
Why you need to know about the changes
Until 5 April 2021 it is the contractor’s responsibility (through their intermediary) to decide whether IR35 applies and to pay the applicable tax due on their fees to HMRC.
From 6 April 2021 some clients will now be responsible for deciding whether IR35 applies and if so, paying the applicable tax due on the contractor’s fees to HMRC.
Which clients will the IR35 changes be applicable to?
Many SMEs who hire contractors won’t need to worry about the IR35 changes. The changes will only be relevant to clients which:
- Hire contractors who work through an intermediary company
- Are a ‘medium’ or ‘large’ business. This means that at least two of the following criteria apply:
- an annual turnover of more than £10.2 million
- a balance sheet of more than £5.1 million
- more than 50 employees
If your business doesn’t meet the above criteria then you can rest easy as your contractor arrangements won’t be affected by the April changes.
If it does, then read on for answers to more of your IR35 questions.
What do the changes mean for ‘medium’ or ‘large’ clients?
You’ve got new responsibilities under IR35.
For each arrangement with your contractors (even if they’re with the same contractor), you’ll need to take the following steps:
✅ Decide whether IR35 applies
✅ Send your contractor a Status Determination Statement
✅ Set up procedures for responding to objections from your contractor within 45 days
✅ If you determine that IR35 applies, deduct income tax and National Insurance Contributions (NICs) from the contractor’s fees before you pay them
✅ Keep appropriate records of your decisions and review them if there are any changes to your arrangements
So, how do I decide whether IR35 applies?
You’ll need to carry out an employment status for tax purposes assessment. This is fact specific, but HMRC has created a tool to help you work out the position for your different arrangements. You are not obliged to use this tool, but HMRC has committed to standing by the result you get from it (provided you complete it accurately).
Relevant factors for making your employment status assessment include:
- The amount of control you have over how, where and when the contractor works for you
- Whether you require the contractor to perform the services personally or if they can provide a substitute
- How integrated the contractor is within your business
- Who provides any equipment required
- Whether the contractor has other clients
- How much financial risk the contractor takes on
Importantly, you must take reasonable care when making your employment status assessments, which means it generally won’t be appropriate for you to make blanket decisions.
Steps to take now to prepare for the IR35 changes
✅ Review your contracts with contractors to identify which may be impacted by the changes (although the new rules only apply to payments made for services provided on or after 6 April 2021)
✅ Discuss the changes to the rules with relevant contractors and consider whether alternative arrangements should be made (eg in some instances it may be appropriate for you to contract with the individual directly or for them to become employees of your business instead)
✅ Put in place appropriate systems and procedures to make your employment status determinations, including deciding who within your business will be responsible
✅ Consider using HMRC’s tool to make your employment status determinations
✅ Put in place appropriate systems and procedures to pass on your status determination statements and to respond to any objections from your contractors within 45 days
✅ Consider whether your contracts with your contractors need to be renegotiated to allow you to withhold tax from their fees where IR35 applies
✅ Consider how you will account to HMRC for any tax if you determine that IR35 does apply (ie do you need to set up a separate PAYE system?)
What about the contractors?
If you’re the contractor and you provide your services to medium or large clients through an intermediary (eg your limited company), it’s a good idea to check your contracts to see if IR35 applies and to discuss the impending changes with your clients. If they make a decision that you disagree with, you’ll have the right to challenge it by writing to them with your reasons. If you’re not sure whether your client is a medium or large business that will be affected by the changes, you’ll have the right to request information from them about their size. Our Q&A on consultancy services has more detailed guidance for contractors.
Still have IR35 questions? Our Q&A on Contracts for freelancers provides an overview of the IR35 tax rules and how they’re changing. For access to a specialist tax lawyer in a few simple steps, consider using our Ask a Lawyer service.