Important update – On 17th October, the Chancellor Jeremy Hunt confirmed that the repeals to IR35 announced by the previous Chancellor Kwasi Kwarteng on 23 September 2022, in ‘The Growth Plan’ would be scrapped. As such the 2017 and 2021 reforms to off-payroll working rules (IR35) remain in place.
What do the 2021 reforms to off-payroll working rules mean?
Reforms to rules on off-payroll working, which signify the biggest change to employment tax in recent history, were planned to take effect in April 2020. On 18 March 2020, the Government announced they would be postponed until April 2021 due to the Coronavirus pandemic. The 2021 reforms to IR35 rules applies for payments made after 5 April 2021 for labour supplied after that date.
We’ve taken a look at the 2021 reforms to IR35 and what businesses will need to do to navigate the changes and comply.
Until now, businesses in the private sector have been able to engage contractors using personal services companies or other intermediaries with little consideration of the contractor’s tax status.
These 2021 reforms require medium and large sized private sector companies to assess the employment status of contractors who provide labour through their own intermediary, such as a personal services company or partnership. Under the current rules, the contractor is accountable, hence this responsibility will switch to the end user business.
If IR35 applies, responsibility for operating PAYE and NICs on the fees paid to the contractor’s intermediary will lie with the fee payer, as they have the contractual relationship with the contractor’s intermediary.
If IR35 does not apply, the contractor’s intermediary can be paid gross.
What is not included in the 2021 reforms?
Private sector end users with no UK connection will be exempt from the new rules and will not be required to determine whether IR35 applies, as will businesses defined as “small”. There are certain conditions businesses must meet to be deemed “small”. These are detailed in the Government guidance.
IR35 only concerns tax and these new rules do not change the contractor’s status in employment law. You can find out more about determining employment status for employment law purposes in our guide: Employment status: employed or self-employed?
IR35 only affects contractors using a personal services company or other intermediary to provide their labour, not those who supply their labour directly, such as sole traders.
IR35 only concerns the provision of labour and not managed or outsourced services, such as IT helpdesks or catering services provided by a third party.
What do businesses need to do to comply with the 2021 reforms?
So, there are a number of practical steps businesses can take to prepare and comply with the 2021 reforms.
Review your labour supply chain
As an end user, take a close look at the labour supply chain to establish what is in scope of the 2021 reforms. You should identify your individual contractors who use their own intermediary to provide labour, who are tax resident in the UK and who supply their labour in the UK.
You will then need to review how you engage with those contractors and carry out a status assessment.
Carry out a Status Assessment and complete and issue a Status Determination Statement (SDS)
You must assess whether contractors are employed or self-employed for tax purposes and record the assessment, with reasons, in a Status Determination Statement (SDS).
Then, you must provide a SDS to the contractor before making any payments after 5 April 2021. If there is an agency in the labour supply chain, you must also supply a SDS to the agency.
In addition, you must put in place a dispute resolution procedure to enable the contractor or agency to challenge the assessment, and must respond within 45 days to any challenge.
If the assessment finds the contractor to be out of scope of IR35, the intermediary can be paid gross.
If it finds them to be within IR35, the fee payer is responsible for operating PAYE, for deducting employee NICs on the fees it pays to the intermediary and for paying employer NICs.
Agencies and Fee payers
If the fee payer is different from the end user, the fee payer should tell the end user if they pay an individual who supplies their labour through an intermediary. For example, if there is a UK agency in the chain which supplies the contractor via an intermediary, the agency is the fee payer.
For contractors within IR35, if you are the fee payer you should add the contractor to payroll, ask them to complete HMRC’s “starter checklist”, exclude them from pensions auto-enrolment and other requirements such as gender pay gap reporting, operate PAYE and NICs on their gross fees (excluding VAT) and pay the contractor’s own intermediary net fees (plus VAT on the gross fees).
Determine employment status for tax purposes
End users must assess whether a contractor would have been an employee for tax purposes if they had been engaged directly by the end user without a personal services company or other intermediary, taking into account the following:
- Control and working arrangements;
- Right of substitution;
- Integration into the business;
- Financial risk – carrying on business on their own account;
- Contractual arrangements; and
- Mutuality of obligation
HMRC’s Check Employment Status for Tax (CEST) online tool
HMRC’s Check Employment Status for Tax (CEST) online tool assesses what the contractor’s status for tax purposes would have been if they were engaged directly. The tool can be found here: CEST online tool (gov.uk)
However, critics have highlighted some shortcomings of the tool, as it does not test whether there is mutuality of obligation in the relationship between contractor and end user and, in some cases, does not produce any assessment. Importantly, if the tool produces no result, you must still make a status determination (and record this, with reasons).
You are not obliged to use CEST, but it contains the key issues that HMRC have highlighted and HMRC have agreed to be bound by the assessment it produces, so it makes sense to do so.
Update your processes and documentation
As the end user, you will need to implement some processes and controls for identifying and recording your use of contractors, including the method and reasons for your status determinations, and policies for engaging contractors which include careful consideration and approval before hiring.
For instance, your contracts and working arrangements with personal service companies, agencies or other intermediaries should reflect the 2021 reforms to IR35 rules.
In addition, if you are the end user and the fee payer (i.e. there is no UK agency in the labour supply chain), you will also need to adapt your payroll and accounts payable systems to comply with IR35.
Moreover, if you are a business supplying staff or managed services, you should ensure that your contracts and agreements issued before 5 April 2021 reflect the 2021 reforms to the IR35 rules.
Considering alternatives for labour supplies
Finally, it is important to remember that there are other options that don’t involve a personal services company or other intermediary, or the application of IR35. For example, as a business, you can:
- Engage the contractor directly as an employee;
- Contract with them directly, on a self-employed basis (as a sole trader) or as a worker;
- Prohibit contractors from using their own intermediaries and require them to go through an agency or other intermediary with no personal services company in the chain, so they are directly employed by an agency or an umbrella company.
What can we do to help?
We hope you found this information helpful, if you would like advice on off-payroll working, please contact our team on 0330 223 5253 or office@fitzgeraldhr.co.uk. We would be delighted to help you.
