HMRC is encouraging businesses to prepare themselves for the changes to the off-payroll working rules, known as IR35, which will come into force on 6 April 2021. From this date, all public authorities and medium and large sized clients will be responsible for deciding the employment status of workers (sometimes known as contractors).
The change applies if you provide your personal services to an end client through an ‘intermediary’. The most common type of intermediary is a worker’s own ‘personal service’ company (PSC), but an intermediary can also be an individual, partnership, or unincorporated association. All intermediaries are potentially impacted by the change.
The IR35 rules were introduced because of government concern about loss of tax revenue, particularly National Insurance Contributions (NICs), arising through the use of intermediaries in the labour chain. The government believes widespread misclassification of off-payroll workers, who should really be treated as employees, is to blame.
It is therefore moving responsibility for making the decision on employment status on each contract away from contractors and PSCs, and on to the client receiving their services. This has already been done for engagements in the public sector.
From 6 April 2021, you are no longer responsible for deciding your employment status if working for a ‘medium’ or ‘large’ client in the private sector. It becomes the client’s responsibility instead.
Note: for unincorporated businesses, only the turnover test applies. In addition, the new procedures don’t apply if your client is based wholly overseas.
If your client doesn’t meet these conditions, it will be considered ‘small’. There’s no change if you contract with a small client. Even after the changes are introduced from 6 April 2021, you remain responsible for deciding if IR35 rules apply to contracts in such cases.
The employment status determination question is this; would you be an employee if any intervening entities, like the PSC, didn’t exist, so you were engaged directly by the client? In many cases, the question is easier to ask than answer, and the factors to weigh up are frequently complex; HMRC’s online status checker tool (CEST) can be used to make a determination.
If the off-payroll working rules apply, your worker’s fees will be subject to tax and NICs. Where a medium or large client decides your contract is within scope of the IR35 rules, it will then:
This effectively means the end of the tax advantage of receiving income via a PSC, with its traditional profit extraction strategy of low salary plus dividend payments. If your contract falls within IR35, you are essentially treated as an employee paying your PSC for tax purposes. You won’t be taxed twice, and you can still choose to extract a combination of salary and dividends from your PSC, though the historic benefit is lost.
Though you will still invoice your client, you are on their payroll. As such, your deemed payment is charged to PAYE and NICs on a monthly basis in the same way as a direct employee.
With the changes less than six months away, you should expect to receive communication from the clients you work for, asking for information about your working practices and outlining what they intend to do. Be aware, too, of HMRC warnings about schemes purporting to minimise income tax and NICs legally. These can constitute tax evasion and pose a real risk to contractors.
You may also want to think about:
Navigating the legislation changes can be complex for any business under normal circumstances; but in the middle of the current crisis, planning for change will likely be challenging. If the IR35 changes impact you and your business and you’d like to discuss your situation, please get in touch.