Changes to IR35 (Off-payroll Working) Rules to Be Implemented April 2021
Rules of the off-payroll working (IR35) persons in the private sector have been changed. However, implementation has been delayed for about 12 months, largely due to the COVID-19 pandemic. As announced by the government on March 17th, 2020, implementation of the new rules is set on 6th April 2021.
The new set of rules is expected to affect contractors in the following industries: recruitment, Personal Service Company (PSC), private end-clients (both medium- and large-sized), and all organisations in the public sector.
Private personal service companies will still be in charge of assessing the IR35 status of their corresponding assignments while implementation of the new rules is still pending. The same is true in the private sector where the status of the IR35 of an assignment remains the end-client’s responsibility.
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Meanwhile, those working in labour supply chains must still comply with their IR35 requirements despite the delay in the implementation of the new rules.
Outcome of the Government’s Recent Review of IR35
The minor changes to the off-payroll working rules was published by HMRC on February 7th, 2020. HMRC made the following announcements despite vague implementation guidelines:
- Customers are not required to pay penalties for errors in off-payroll assignments during the first year, unless it has been proven that they deliberately did not comply
- Only in cases where there is suspected fraud and criminal behaviour will PSCs undergo investigation. The information resulting from the changes may be used during this process.
- The new rules will only apply to services carried out from the date the new rules are implemented (expected to be 6th April 2021)
The new set of rules are only applicable from the date of their implementation, which is set to 6th April 2021.
- Clients are now required by law to respond in case an agency or a worker requests for information about their size.
The rules also state that the new changes do not apply to end-clients based overseas, with no UK presence at all. However, we would like to reiterate that implementation of these changes remain pending until early 2021.
While the changes for the private sector have yet to be executed, contractors are advised to carefully assess the IR35 status of their assignments to avoid miscalculating their taxes.
Summary of the IR35 Changes for the Private Sector
A summary of the changes to the IR35 is available below:
It is the end-client’s responsibility to determine whether an assignment is inside or outside of IR35 rules
Similar to the rules set for the public sector in April 2017, the new IR35 changes for the private sector state that it is the end-client’s responsibility to determine the IR35 status of its assignment with a PSC.
Small businesses are exempted from the new IR35 rules
As mentioned, the new IR35 rules are applicable to “”large” and “medium” sized businesses in the private sector and all organisations in the public sector. This means that end-clients from small businesses are exempted from these new rules. The Companies Act 2006 defines “small businesses” as:
- businesses that have an annual turnover £10.2 million or less
- businesses with a balance sheet total £5.1 million or less
- businesses with 50 employees or less
If an end-client’s business meets two or more of these criteria, it means that the new changes do not apply and the PSC remains responsible for determining the status of an assignment.
There are certain clauses in the legislation that veto medium and large-sized businesses from setting up companies or subsidiaries that they may use to acquire services from PSCs. The aggregate turnover amount and the aggregate balance sheet total of the connected entities, of the parent company will remain as the basis of the legislation.
However, for the public sector, no such exemption has been set, making the new changes applicable to all end-clients (small, medium, or large sized).
The IR35 Status Determination Statement
Upon implementation of the new IR35 rules (which is set, tentatively, on April 2021), the end-client is required to confirm the IR35 status of an assignment through a Status Determination Statement or SDS. This SDS must be given to the PSC worker in writing. In case the labour supply chain involves the services of an agency, a copy must also be given to the agency paying the PSC. This means that the burden of furnishing an SDS and giving it to parties involved is on the end-client or the party paying the fee (i.e., agency).
IR35 status dispute resolution must be led by the end-client
Apart from administering an SDS, another responsibility of the end-client is establishing arrangements to settle SDS-related disputes from PSCs. End-clients are given 45 days to respond, in writing, with the result of the review of the dispute. The outcome must clearly state whether the original SDS still applies or a revised SDS has been proposed. If the decision confirms that the SDS has been modified, then the end-client must also provide a new SDS, still complying with the guidelines in settling disputes.
Transfer of employment tax liabilities to another relevant person
Employment tax liabilities are part of the responsibilities of the organisation that is also responsible for issuing the SDS. For instance, if an agency is involved, then, employment tax liability and the issuance of the SDS fall on the fee-payer. These are clauses indicated in the legislation.
According to the same legislation, HMRC is allowed to recover tax liabilities from another “relevant person”, or any other party involved in a PSC payment, including the highest party that is not compliant with the legislation. This clause allows HMRC to make sure that all parties involved in the labour supply chain comply with all the stated rules.
Removal of the 5% administration allowance
Currently, there is a 5% allowance given to PSCs covering the costs of administering the off-payroll working rules. With the implementation of the new rules, this allowance will be removed in the public sector. However, for PSCs in the private sector who are working with “small” end-clients, the allowance will remain.
Check of Employment Status Tool (CEST)
The government’s Check of Employment Status Tool (CEST) underwent an update in November 2019. However, even after this update, some still have questions about how accurate the tool is.
Conclusion – the IR35 rules will still cause issues
Many accountancy service providers responded to the consultation initiated by the government. Concerns were raised but most of these were discounted and were not included in the final legislation. Hence, these issues continue to linger:
- erroneous and inaccurate results generated by the government’s Check of Employment Status Tool (CEST)
- the need for an end-client to produce additional investment in order to complete an employment status determination on a contract by contract basis
- the removal of the 5% allowance for Personal Service Companies to administer off-payroll working rules
- risks posed to PSCs by the dispute resolution process which should be the end-client’s responsibility
Frequently Asked Questions on the New IR35 Rules
Q: What does inside and outside IR35 mean?
A: Being inside IR35 means that you are employed by an end-client and there are deductions for employment taxes. If, on the other hand, you are outside IR35, then it means that you have a self-employed status and you do not have deductions for employment taxes.
Q: What is a labour supply chain and, during the issuance of a Status Determination Statement, does the size of the entity matter?
A: A simple labour supply chain refers to a contracting system where the end-client directly employs a PSC. In this arrangement, the SDS is prepared by the end-client and forwarded to the worker under the PSC.
Upon implementation of the new set of rules, issuance of the SDS will remain the end-client’s responsibility no matter the size. This means that whatever the number of entities involved in a supply chain, the end-client must prepare the SDS and pass it to the worker. Only “small” businesses have been exempted from the new rules. Instead of the size of the agencies involved, applicability of the changes depends on the size of the end-client. So, unless the organization or the end-client is classified as “small”, issuing the SDS will still be one of their obligations.
However, in case an agency is involved, the end-client will still need to prepare the SDS and pass it to the agency. It then becomes the agency’s responsibility to pass the SDS to the worker.
If there are more than one agencies, the end-client must issue the SDS and pass it to the first agency. The first agency will then pass the SDS to the second agency, who will, in turn, pass it to the worker. Regardless of the number of agencies involved, the end-client must always be the one to prepare the SDS, not the agency or any of the agencies.
If, for any reason, a party involved in the labour supply chain fails to pass the SDS to the next party in the labour supply chain, then the deduction of employment taxes becomes their responsibility.
Q: Does the length of the contract affect the IR35 status of an assignment?
A: Although it is a factor, it is important to look at the coverage of the overall assignment when analysing the length of the contract.
If there is a shortage in the availability of contractors, or if the assignment needs the expertise of a contractor to carry out a complicated assignment, then that contractor may be employed under a long contract. However, some long contracts also cover maternity leave. This could simply be considered an employee replacement, making the nature of the assignment one of an employee.
If a PSC has contractors working on short, overlapping contracts for various clients, then this could be a sign that the assignments are outside IR35.
Q: When are the deductions for employment taxes going to start?
A: If you were given an assignment inside IR35 before the implementation of the new rules, it is the end-client’s or the agency’s (fee-payer) duty to deduct employment taxes, regardless of when your payment will be released.
Q: Who makes the deductions for employment taxes after 6th April 2021?
A: If a contractor works directly with an end-client inside IR35, after 6th April, it will still be the end-client who is responsible for deducting income tax and paying the Employee National Insurance Contributions (NIC) from a contractor’s gross payment. The end-client is also responsible for paying the employer NIC.
If, however, you work through an agency, that makes the agency the fee-payer. That means that the income tax deduction will now be the agency’s responsibility, as well as paying your NIC from your gross payment, and paying the employer NIC.
If, on the other hand, a “small” end-client employs your limited company, then you will be the one to deduct income tax, and pay the National Insurance contributions of both the employee and the employer, as the current rules state.
You must note that your “employment” status depends on the end-client’s review of your assignment.
For assignments worked outside IR35, it is not obligatory for you to pay taxes. It is also your Personal Service Company’s responsibility to account payments received from your end-client or agency in your Corporation Tax return. Your Corporation Tax return must include all your taxes paid through your company payroll or your annual Self-Assessment.
Q: By saying “an agency would pay the fees”, does this include YunoJuno?
A: Since YunoJuno acts as an agency, then yes, it includes YunoJuno. It means they will deduct employment taxes as long as the assignment is within the coverage of IR35. You may check YunoJuno’s website for their response to this concern.
Q: What if I have an overseas client?
A: The updates specify that clients that do not have UK presence, or are wholly based overseas, then the new changes do not apply. However, if they have an office in the UK, then they are subject to the same rules, applicable after the implementation on April 2021. According to HMRC, when your taxes are paid in the UK, it means that the assignment is within IR35. Therefore, the overseas end-client is required to provide a Status Determination Statement.
Q: Are SDS legally required to be published when mandated to go PAYE?
A: In a PAYE employed assignment, the worker is not contracted through a limited company. Instead, the worker is employed as an individual. As such, an SDS is not required because the work is not within the scope of IR35.
Q: What about timesheets?
A: Some end-clients require workers to submit timesheets. If the employed person is paid personally for the set number of hours he has worked for a week, then the worker’s assignment may be considered an employment. If the end-client requests for a timesheet to serve as basis of the payment to be made to the limited company, then your invoice or receipt must bear the name of your company.
Q: If a computer consultancy signs a contract with my PSC while at the same time having a project with their own client, who becomes the “end client”? Is it the consultancy or is it their client?
A: It depends on whether the computer consultancy functions as an agency or does the outsourced job. If the consultancy acts as a recruitment agency that provides workers only, with the PSC included, to their end-client, then the consultancy’s end-client is also the PSC’s end-client. If, however, an end-client outsources a job to the consultancy, and the consultancy actually executes the job using your PSC, then the consultancy becomes the end-client of your PSC.
Q: Is the legislation retrospective?
A: There are new rules set by HMRC as to the party tasked to determine the status of an assignment, but there are no changes to the IR35 legislation.
As previously mentioned, HMRC will only look into PSCs retrospectively if cases of fraud or criminal behaviour are suspected. So, unless there is any reason to, HMRC will not subject a PSC to an investigation.
Q: What’s the situation regarding Housing Associations and Charities?
A: HMRC has clearly stated that “companies owned or controlled by the public sector” are public sector bodies as long as IR35 is concerned. However, it also depends on the individual body’s constitution. It is suggested that you discuss with your end-client personally to know if they are under the public sector.
Q: Will there be an increase in my rate if I am inside IR35?
A: One of the consequences of the proposition of the new IR35 rules is an increase in contractor’s daily rate. Although this does not apply to all as there are varying amounts, it is believed that some contractors benefited from negotiations. To, at least, maintain your net income, it is recommended that you negotiate a 20% increase in your daily rate.
Q: Is it advisable to keep my limited company open?
A: For limited companies that might be affected by the changes, it would be wise to think long or mid-term and analyse possibilities or opportunities to expand before deciding to totally stop or continue operations. There are profits involved that need protection. However, if the company has different sources of revenue because it on assignments both inside and outside IR35, then it is safe to advise it to continue trading.
Q: What happens if I do not have an SDS by April 2021?
A: It is required by the legislation that “medium” and “large” sized organisations in the private sector and all businesses in the public sector prepare their worker’s SDS. Without an SDS, any end-client or agency is not allowed to deduct employment taxes. It is, therefore, important to talk discuss your employment status before changes are implemented on April 2021.
Q: How do I know if my end-client is small?
A: “Small” end-clients are characterised by turnovers of less than £10.2 million and total balance sheets of less than £5.1 million. “Small” end-clients also have less than 50 employees. If your end-client meets at least two of these characteristics, then it is considered “small”. Be aware that based on the new rules, it is prohibited for “large” organisations to set up “small” subsidiaries to avoid coverage of the new rules. The changes will apply to the parent company or the ultimate end-client.
Q: What is happening with the CEST (Check Employment Status Tool) from HMRC?
A: The CEST was updated in late 2019. HMRC has released the updates made on the tool and the output presented to the HMRC board.
Q: Will this affect my Self-Assessment?
A: If you have already been registered to file a Self-Assessment, then you must continue filing it. Your tax return will reflect your IR35 income as “income from employment”.
Q: What is financial risk?
A: Financial risk refers to the risk or possibility of not getting paid by an end-client.
Q: Are substitutions allowed?
A: Substitutions are usually allowed for contracts that are outside IR35. If your company decides to deliver a substitute, then the end-client has no choice but to agree, provided the substitute has, at the least, met specific qualifications. If this sending of a substitute has previously happened or has previously been accepted by an end-client, then it confirms that the assignment is already outside IR35.
One sign that your assignment is inside IR35 is when your company offers your services alone, and does not recommend a substitute. You have the privilege to sign an agreement with another contractor or PSC to act as your substitute in case the need arises.
Q: What is an umbrella company?
A: An umbrella company is a company employed by an agency to process contractors’ payroll. In this case, the contractor is under the employment of the umbrella company under PAYE and it becomes the umbrella company’s duty to deduct employment taxes. The umbrella company then pays the taxes to HMRC. In most setups, an umbrella company may charge a fee for each timesheet that they process for the payroll.