In an ever-changing working world, it has never been as important to stay in touch and up to date with what's happening around us. Our bite-sized webinars are designed to focus on practical tips for in-house lawyers.
With the extended implementation date of 6 April 2021 for the planned changes to IR35 in the private sector fast approaching, our latest event focused on what in-house teams need to know about the key changes, what challenges our clients are facing and what they need to do to comply with the new rules.
The key takeaway points are set out below:
What is changing?
- IR35 is tax legislation designed to prevent “disguised employees” from avoiding tax by providing their services through an intermediary, often a personal service company
- Currently it is the intermediary’s responsibility to determine the individual’s tax status and, if an employee, to account for tax and NICs
- However, from 6 April 2021, this responsibility will shift for large and medium-sized private and third sector businesses, with the existing IR35 rules continuing to apply to small businesses
- Under the changed rules, the hiring business/end user will be responsible for determining the tax status of any individuals engaged through an intermediary
- Where the individual is deemed to be employed for tax purposes, HMRC will seek recovery of tax, NICs and apprenticeship levies (“PAYE deductions”) from the fee payer in the first instance that is, from the entity which pays the intermediary
- If the fee payer is not a UK business and/or it is controlled by the worker, then the deemed employer will make the relevant PAYE deductions
- When determining status, the hiring business/end user will need to consider not just the terms of the actual written contract in place with the intermediary but also the hypothetical contract, that is, what happens in practice
- IR35 works on an engagement by engagement basis so a status determination will need to be made in respect of each engagement, even if it is an intermediary that has been used previously and even if the engagement is only minimal, such as 1 day a week
- Key factors in determining the tax status of an individual include: personal service, the right of substitution, mutuality of obligation, supervision/direction/control and integration into the organisation
- Other factors to consider include the level of financial risk taken on by the individual and whether the individual supplies their own equipment
Anticipated challenges and risk areas
- HMRC has a tool – CEST - to assist hiring businesses/end users to determine the tax status of individuals. HMRC has updated CEST to make the language and presentation of the questions clearer in anticipation of the extension of the IR35 rules to the private sector. HMRC will stand by CEST outcomes if reasonable care has been taken in carrying out the determination but some CEST outcomes produce an inconclusive result!
- Blanket decisions should not be made when making status determinations
- A hiring business/end user needs to inform the entity it contracts with (e.g. the agency or the intermediary) and the individual of the status determination it has reached
- Either the individual or the deemed employer can challenge a status determination if it is thought to be wrong or if the working arrangements have changed over time. The hiring business/end user client must respond within 45 days of the challenge
- Many individuals will not want to be deemed employees for tax purposes. Whilst the final decision rests with the hiring business/end user, a determination of employment may mean contractors leave or refuse to take on work
- If a hiring business/end user does not carry out the status determination, does not use reasonable care in carrying out the determination and/or does not pass on the status determination, the tax liability will rest with them. In addition, if the fee payer such as an agency does not pay the tax and NICs, liability can pass back up the labour supply chain and can end with the hiring business/end user
- Hiring businesses/end users will need to consider what additional tax indemnities they may need within agency contracts / consultancy agreements to cover the potential liability risk
- Individuals who are determined to be an employee for tax purposes may try to assert potential rights as workers or employees for employment purposes as well, although the two types of status are not always aligned
- Carry out an audit of your workforce to identify relevant individuals and their status
- Speak to those individuals who will be caught by IR35 to discuss approach
- Consider updating terms of engagement to ensure they include appropriate indemnities and individuals are self-employed or take them on as employees
- Consider communications / FAQs and train managers who appoint contractors
- Are your current systems enough or do they need to be updated?
- Consider cost implications and budget appropriately
- Begin to advertise roles inside or outside of IR35