HMRC confirms that the IR35 reforms will go ahead:
IR35 is back on the agenda – and this time it’s not going away
This impending change to IR35 is the latest in a series of anti-tax avoidance legislation and the message seems clear – HMRC would like to see everyone paid through the PAYE system. These reforms were introduced into the public sector in 2017 and had been due to be extended into the private sector earlier this year until the COVID-19 outbreak delayed implementation. However, the new legislation has now been granted royal assent and will become effective in April 2021.
What is IR35?
In 1999 the then UK Chancellor of the Exchequer Gordon Brown announced in the Inland Revenue budget press release number 35 (hence IR35) measures designed to tax “disguised employment”. The objective was to counter the use of the one-man limited company model (usually referred to as a Personal Service Company or PSC) by Freelance Contractors to enable them to claim tax free expenses and reduce National Insurance contributions. Although originally intended to create a “level playing field” for personal taxation, it has in fact spawned a wide range of tax avoidance structures and legislators have struggled to keep pace with market changes.
Who does it affect?
In recent years there have been many high profile attempts by HMRC to recover large sums of unpaid taxes, including cases against media personalities and football referees. However, HMRC are also very active in pursuing bread and butter claims through their Targeted Ani Avoidance Rule (TAAR) task force. The simple principle is that if the relationship between the Employer and Contractor is judged to fall within IR35 guidelines then all payments to that worker should be taxed as if the payment had been made through the PAYE scheme. Any worker who provides a service but is not on the payroll could potentially be caught by this legislation (including the likes of IT Consultants, Bookkeepers, Web Designers and Online Marketers), regardless of whether they also work for other businesses or are supplied via an intermediary such as a Recruitment Agency. The only exemption from next year will be for smaller businesses (e.g. those employing fewer than 50 staff and with a turnover of less than £10.2m) that engage with Contractors, who will continue to operate under the existing rules for now.
What is changing in 2021?
It is a fact that routing payments for work through a PSC is financially beneficial to Contractors and so it should not be surprising to learn that, as responsibility for determining the IR35 status has up to now been left to the Contractors themselves, we have witnessed a proliferation in PSC use. However, HMRC believe that many situations exist where PSC’s are inappropriate and so by definition disguising income that should ordinarily have been taxed. Consequently, effective from April 2021 the End User will be required to make the call as to whether both existing and new off-payroll workers fall within the IR35 rules (in fact it will apply to all payments made after 6 April 2021, even when the work was actually undertaken before that date). This will mean that private sector businesses will have to provide their Contractors with a status determination statement which states whether they believe IR35 will apply and why. The legislation also provides for a dispute resolution process which will require the End User to respond to any challenges to their decision, supported by their reasoning, within 45 days
Inside / outside IR35 - how to decide
Unfortunately, it is not permissible to make blanket decisions as to whether or not relationships fall within or outside IR35. Each situation should be judged on its own merits and seven separate factors taken into consideration, namely: the contract, control, mutuality of obligation, right of substitution, financial risk, employee benefits and provision of equipment. This is not a simple process. It is unlikely that an End User will have the in-house capability to properly undertake such a review, let alone produce the determination statement, and so would be faced with the following options:
Try to make the determination themselves unassisted
Enlist the support of a professional advisor or someone that understands IR35
Use the HMRC “CEST” online assessment tool (to date this has not proved 100% accurate and is often inconclusive)
Use a 3rd party assessment tool (there are several on the market, some good)
What are the risks
The initial risk lies with the Fee Payer who is defined as the person closest to (i.e. making payments to) the PSC. Whilst this could be the Employer / End user, in more complex supply chains it could be a recruitment agency or an umbrella company. Risks that could arise for the Fee Payer are not making deductions when the determination is that they should be made, in which case HMRC could demand back dated PAYE & NIC, or making deductions when the determination is that they should not be made (i.e. falls outside IR35), when the Contractor can claim for unlawful deductions. Any liability could potentially transfer up the supply chain to the Employer / End User where, for instance, no determination was provided, an appeal for reassessment of determination was made but ignored, an incorrect determination was made or where the Fee Payer or other parties in the supply chain are unable to meet any successful claim brought.
A final word
There are only a few months left before these changes become effective. Supplier contracts may need to be re-negotiated and determination statements prepared and issued, so an early start is recommended. Unfortunately, the process is not helped by the initial legislation having been poorly drafted. HMRC have accepted that changes are required to avoid bringing all Agency Workers into scope, even when they are already being paid through a fully compliant PAYE scheme (as are all Kelburn Temporary Workers) and not just those who operate through a PSC. However, there is enough certainty about the reforms to enable End Users to commence this work now.
When reviewing this legislation it should be remembered that supply chains can be complex and that the reforms may also apply if a Worker is being supplied to you via an Intermediary such as a Recruitment Agency or Umbrella Company when there is also a PSC sitting in the supply chain.
Also, it should be remembered that these reforms still permit genuinely self-employed Workers to operate through a PSC without risk to any party. It is simply that the End User is now pivotal in making that determination and must deal with additional and unwanted administration.
This newsletter is a brief overview of a complex subject and should be used as a guide to the subject only. If you wish to discuss a specific situation then feel free to contact us.