Beginning next month, IR35 in the private sector will change. This means some self-employed workers – and the businesses that hire them – will have to pay tax differently.
Previously, if a worker had a client in the public sector, it was the client’s responsibility to decide the worker’s employment status. However, if the worker’s client was in the private sector, it was the responsibility of the worker’s intermediary to decide their employment status for each contract. The private sector includes third sector organisations, such as some charities.
From 6 April 2021, the way the rules are applied will change. All public authorities and medium and large-sized clients will be responsible for deciding the employment status of workers. Contractors are no longer responsible for deciding workers’ employment status if working for a ‘medium’ or ‘large’ client in the private sector. It becomes the client’s responsibility instead.
If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply. The most common type of intermediary is a worker’s own ‘personal service’ company (PSC). However, an intermediary can also be an individual, partnership, or unincorporated association. The change will potentially impact all intermediaries.
There are three main groups that are likely to be affected by the IR35 rollout in the private sector:
1. Up to 170,000 individuals who are supplying services through an intermediary, such as a PSC, without which they would be fully employed
2. Up to 60,000 medium and large private-sector organisations (with 50 or more employees), which hire workers via PSCs
3. Around 20,000 recruitment agencies and other intermediaries which supply staff through PSCs.
The IR35 reforms will crack down on tax avoidance by companies and individuals that HMRC considers “disguised employees”. For example, contractors who work like regular employees but, because they use a limited company, gain an advantage by paying corporate rather than employment taxes. HMRC estimates that only one in 10 people in the private sector who should be paying tax under the current IR35 rules are doing so correctly.
If you realise you have made a mistake in applying the off-payroll working rules, you should inform HMRC at the earliest opportunity. HMRC can work with you to put it right, whether that means paying unpaid tax or refunding overpaid tax.
Where additional tax is payable as a result of a mistake, penalties may be due. However, if you tell HMRC early and make an effort to correct the mistake, it can help mitigate any penalties.
In a briefing earlier this year, HMRC confirmed that it will not issue penalties for inaccuracies in the first 12 months of the regime, unless there is evidence of deliberate non-compliance. It also committed to not using information acquired to open a new compliance enquiry into returns for previous years. That is providing there is no reason to suspect fraud or criminal behaviour.