Changes to the off-payroll working rules for private sector organisations originally planned for April 2020 will now come into force from 6 April 2021.
As a result, large and medium sized organisations engaging contractors through an intermediary will have various responsibilities and potential liabilities. In order to support our clients grappling with the changes, our webinar on 28 January focused on what the changes mean for private sector organisations and answered the most commonly asked questions. The key takeaway points are set out below:
What is changing?
- The public sector off-payroll working rules will be extended to the private sector from 6 April 2021
- The rules will only apply to large and medium-sized businesses, with the existing IR35 rules continuing to apply to small businesses
- The hiring business/end user will be responsible for determining the tax status of any contractors engaged through an intermediary
- Where the contractor is deemed to be employed for tax purposes, HMRC will seek recovery of tax and NI from the fee payer in the first instance that is, from the entity which pays the intermediary
- Liability can pass up the chain to the hiring business/end user if the fee payer does not meet its obligations
Key factors to determining IR35 status
- End users will need to take into account 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
- Key factors in determining the tax status of a contractor 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 contractor and whether the contractor supplies their own equipment
Anticipated challenges and risk areas
- HMRC has a tool – CEST - to assist hiring businesses/end user clients 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. However, CEST is not perfect!
- Blanket decisions should not be made when making status determinations
- A hiring business/end user client needs to inform the entity it contracts with (e.g. the agency or the personal service company) and the contractor of the status determination it has reached
- Contractors or fee payers can challenge a status determination if it is thought to be wrong
- Many individuals will not want to be deemed employees for tax purposes. Whilst the final decision rests with the hiring business/end user client, a determination of employment may mean contractors leave or refuse to take on work
- If a hiring business/end user client does not pass on the status determination, the tax liability will rest with them
- If a hiring business/end user client deems the individual is not an employee for tax purposes and HMRC successfully challenges this determination, the tax liability will rest with the fee payer
- As a result, hiring businesses/end user clients will need to consider what additional tax indemnities they may need within agency contracts / consultancy agreements to cover the potential liability risk
- Any tax and NIC paid in respect of off-payroll contractors will count towards the employer’s payroll bill for calculating apprenticeship levy
- Individuals who are determined to be an employee for tax purposes may 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
- 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
- Do not rely on a further delay