The extension of the off-payroll working rules (IR35) to the private sector was due to come into force on 6 April 2020 but was delayed due to the Covid-19 pandemic. The new rules now come into force on 6 April 2021 and apply to medium or large private sector end users/clients, and there is an exemption for ‘small’ businesses. In this article, partner Jill Springbett outlines the off-payroll working rules and sets out how you determine if they apply.
What are the IR35 rules?
The IR35 rules apply to individuals who provide their services to clients through an intermediary, usually a personal service company (“PSC”), on engagements where they could be regarded as employees of the clients if they provided their services directly. IR35 requires the PSC to pay broadly the same amounts of tax and national insurance that the client would pay if the individual were employed by it.
What changes come into effect on 6 April 2021?
Since 6 April 2000, contractors who provide services to clients through a PSC have been responsible for deciding if the IR35 rules apply (thereby making them deemed employees).
If they decided the rules applied, the PSC would have to do an IR35 computation and account to HMRC for PAYE on their fees. HMRC estimates that compliance by PSCs has been as low as 10%.
Since 6 April 2017, where the client is a public body, the end user/client rather than the contractor has been responsible for deciding if IR35 applies. This will be extended to the private sector from 6 April 2021.
Who do the new rules apply to?
The new rules now also apply to private sector companies (which can include charities and third sector organisations) that meet two or more of the following conditions:
- they have an annual turnover of more than £10.2m
- they have a balance sheet total of more than £5.1m
- they have more than 50 employees
Balance sheet total means the total amounts shown as assets in the company’s balance sheet before deducting any liabilities. This is in line with the small companies’ regime.
When considering the qualifying criteria, a corporate entity must look at the last two financial years for which the period for filing its accounts and reports ended before the beginning of the tax year to determine whether the tests are met.
For example, for the tax year 2021/22, a private corporate entity’s financial year ends on 31 March 2020. The period for filing ends on 31 December 2020. This period ends prior to 6 April 2021, so this year will be included in considerations regarding size. See below for when you have to start applying the rules.
A corporate entity will qualify as small in its first financial year following incorporation providing the period for filing for that year does not end before the relevant tax year.
The off-payroll working rules do not apply to organisations based wholly overseas.
There are also rules that cover connected and associated companies. If the parent of a group is medium or large, their subsidiaries will also have to apply the off-payroll working rules.
Please note that charities and not for profit organisations do not need to take into account donations when calculating turnover to determine their size.
What is the ‘simplified test’?
A simplified test applies to some clients and considers annual turnover. You must apply the new rules if you have an annual turnover of more than £10.2m and are not:
- a company
- a limited liability partnership
- an unregistered company
- an overseas company
For the purposes of this test, clients will be medium or large if their turnover is more than £10.2m for the last financial year ending at least nine months prior to the beginning of the tax year. Clients will qualify as small in their first financial year providing it ends less than nine months prior to the beginning of the tax year.
What you need to do as a client unless you’re exempt
You will need to decide the employment status of every worker who operates through their own intermediary, even if they are provided through an agency.
You should communicate your determination using a Status Determination Statement (SDS), which must:
- be passed to the worker and the person or organisation you contract with
- give your conclusion and the reasons for coming to it
You can issue an SDS before 6 April 2021 if the rules apply.
You’ll also need to:
- make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
- have processes in place to deal with any disagreements that arise from your determination
- confirm the size of your organisation if asked by the person or organisation you contract with, or the worker
If you are also the fee-payer and the off-payroll working rules apply, you will need to deduct and pay Income Tax and National Insurance contributions to HMRC.
You can use HMRC’s Check Employment Status for Tax service to help you decide if the off-payroll working rules apply.
Who to tell about your determination
From 6 April 2021, you must tell the worker and the agency, or other organisation you contract with, your determination (whether your determination shows that the off-payroll working rules will apply or not).
You must also provide reasons for your determination. A worker or deemed employee may disagree with the employment status determine you reach, in which case certain provisions and procedures will apply.
The responsibility for deducting Income Tax and employee National Insurance contributions, and paying employer National Insurance contributions, is yours until you tell the worker and the person or organisation you contract with of your determination and the reasons for it.
If the working practices of the engagement change or you negotiate a new contract with the worker, you need to make sure that you re-check the rules to see if they still apply.
Small-sized private sector clients
If you’re a small-sized client in the private sector, you will not have to decide your workers’ employment status. This will remain the responsibility of the worker’s intermediary (usually a limited company). However, you must confirm your size if asked by the worker or the person or organisation you contract with. This is to make sure that you, agencies and workers can consider what rules apply.
When do you need to start applying the rules?
Public sector clients
Public sector clients must continue to apply the rules when the changes come in on 6 April 2021.
Private sector clients
If youmeet the conditions of the simplified test (broadly if you are not a company or limited liability partnership), you must start applying the rules from the start of the tax year following the end of the calendar year when you met the conditions (ie your turnover exceeded £10.2m).
If you do not use the simplified test and do not meet the conditions on 6 April 2021, your circumstances may change later on. If you meet the conditions for two consecutive years, you must apply the rules from the start of the tax year following the end of the filing period for the second financial year when you met the conditions. Likewise if you go from medium or large to small, you only become exempt after the second year of being small.
You can find out more about the new IR35 rules by watching a recording of the webinar entitled ‘Changes to IR35’ we presented jointly with Glaisyers Solicitors on 24 March.
The above is a broad summary of the new IR35 rules, and if you have any queries about them, please contact Jill Springbett.
Warning: The information set out above and in our webinar is merely general guidance and should not be relied upon as formal advice. The advice we give to each client will depend on their specific circumstances. We suggest you take professional advice before taking any action in relation to the issues discussed.