IR35 – What is it and where does it apply?
IR35 is tax legislation aimed at preventing avoidance or reduction of tax and National Insurance Contributions (NICS) by workers and those hiring them through the use of an intermediary between the end user (‘the client’) and the worker. Workers who, if no intermediary was used, would have employee status, are “deemed employees” by HMRC and have to pay income tax and NICS as if they were employed by the client. This work is termed “off payroll”.
The scheme has been in force since April 2000 and has been heavily criticised throughout its time, for unfairly targeting certain organisations and for its ambiguity. As such, the legislation has been updated as of 6 April 2021 for private sector clients. This has already been implemented in the public sector (as of April 2017).
What is an intermediary?
An intermediary is any person or organisation from which a worker receives (or is entitled to receive) a payment or benefit which is not chargeable to tax as employment income. In many cases, the intermediary is a limited company which will be referred to as a “personal services company”.
In the case of a company, in order to be classed as an intermediary, it must not be an associated company of the client (i.e. under the same control or one controlled by the other). The worker must have a material interest in the intermediary company; or the payment or benefit received by the worker from the intermediary can “reasonably be taken to represent” payment for the services provided by the worker to the client.
Employment Status
Determining a worker’s deemed employment status is not straightforward, as evidenced by the vast numbers of cases such as Uber (considered in our article “Supreme Court Ruling – Uber drivers are workers“) heard in the Tribunals and higher courts. To determine an individual’s employment status, it is necessary to ascertain both the terms of the actual contractual arrangements between the parties and the actual working arrangements in practice. In other words, it is not enough to go by what is written in a statement of terms or contract of employment; rather, the parties must look at the true nature of the relationship in practice. Where intermediaries are used, the employment status of an individual can be determined by assessing whether or not the individual would be an employee, but for the existence of the intermediary.
In arrangements involving a client and an intermediary there will be two key contracts, the first one between the intermediary and the client and a second one between the intermediary and the worker.
In arrangements which involve an agency providing workers to the client, there may be three contracts. The first between the client and the agency, the second between the agency and the intermediary and the third between the intermediary and the worker. In order to establish the correct employment status, all of these will have to be subsumed into one “hypothetical” contract.
HMRC has published guidance on how to “check employment status for tax” (CEST) and has a tool which can be used to establish employment status on their website. This can be relied upon as evidence for an individual’s status for tax and NICs purposes, if the status is ever questioned by the worker or client. However, this will only be the case where the questions are answered in a way which accurately reflects the terms and conditions under which the individual provides their services to the client.
What were the previous rules?
Prior to 6 April 2021 in the private sector and April 2017 in the public sector, it was the intermediary’s responsibility to decide on a worker’s employment status for each contract they held.
What are the rules as of 6 April 2021?
The new rules mean that the responsibility for determining the status of the worker has shifted from the intermediary to the end client. However, this change only applies to medium and large private sector clients. Where the services are provided to a small client, it is the intermediary who remains responsible for deciding a worker’s employment status and whether the rules apply.
The off-payroll working rules will now apply if each of the following tests are met:
- The client is not a small entity;
- An entity qualifies as small if one of the following is met:
- The company’s first financial year is not relevant to the tax year; or
- The ‘small companies regime’ applies to the company for its last financial year by satisfying two of the following:
- it has a turnover of less than £10.2million;
- it has a balance sheet total of less than £5.1 million; and
- has no more than 50 employees
- An entity qualifies as small if one of the following is met:
- The entity has a UK connection;
- An entity has a UK connection for the tax year where it is resident or has a permanent establishment in the UK.
- The agency legislation does not apply, and the worker is not a visiting performer;
- A visiting performer is an entertainer, sportsman or sportswoman (“a performer”) who is non-UK resident for a tax year and performs a relevant activity in the United Kingdom in the tax year.
- The worker is providing services to the client and not to an outsourced service provider
- An outsourced service provider is where a customer contracts with a separate entity for the supply of an outsourced service, rather than the supply of a worker. And;
- The worker is subject to UK tax or NICs.
What are an end-user’s new obligations?
Businesses will need to review their current workforce and identify any individuals who are supplying services through their own limited company or another form of intermediary. It will then be important to put processes into place to identify future individuals working in this way. If a business identifies relevant individuals or agencies that the business engages with, it will be necessary to determine whether or not the off-payroll working arrangements apply in these circumstances.
If off-payroll applies, then the relevant parties will need to be informed of this by using a Status Determination Statement (SDS) as explained below. It will also be necessary to agree with the agency who will need to operate PAYE and the correct income tax and NICs contributions that need to be made.
Finally, businesses should ensure that they have a designated individual (or team) to take responsibility for understanding the regime and ensuring that it is correctly and effectively implemented. Records should be kept of status determinations, along with the reasons for them and any applied HMRC guidance. A regular review should be timetabled to ensure that all records are up-to-date.
What is a Status Determination Statement?
An SDS is a statement from the client declaring a worker’s deemed employment status following an IR35 assessment. The statement must also include reasons for reaching the conclusion on the employment status.
The SDS must be shared with the worker and the intermediary, agency or any other organisation the client contracts with. This is necessary, whether the off-payroll working rules apply or not.
New Guidance
On 3 March 2021, HMRC published changes to its off-payroll working rules guidance. Most notably, the changes include:
- Confirmation that if a worker has no interest in a company, the company will not be a relevant intermediary.
- Confirmation that a client’s status determination statement (SDS) can be provided through an online portal and expanded guidance on when a new SDS should be provided. The revised guidance confirms that clients retain their obligations even if they subcontract the tasks of determining the worker’s status or producing the SDS.
- Guidance on the new targeted anti-avoidance rule (TAAR) announced as part of the Spring 2021 Budget.
The revised guidance also provides information on correcting payroll inaccuracies and confirms that deemed employers cannot recover employer NICs from the amounts treated as employment income. Further, it clarifies that clients can stand by their SDS if disputes are instigated without any reason or new information.
What do employers need to do immediately?
The Government has said that businesses will “not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, regardless of when the inaccuracies are identified, unless there’s evidence of deliberate non-compliance”. While this gives employers a period of grace to get up to speed with the new rules and how they apply, it will still be important for them to understand whether or not the rules apply to their workers and to ensure that they have the correct procedures in place to comply. The first step will be to identify any workers who fall under the off-payroll working rules and ensure that the correct tax and NICs are made for them.
This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such.
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