IR35 Reform in the Private Sector

IR35 private sector reform explained

What are the changes to IR35 as of April 2021?

Medium and large sized private sector businesses hiring personal service company contractors are responsible for determining the IR35 status of their contractors as of April 2021.

Those workers who fall inside of IR35 are required to have PAYE and National Insurance Contributions (NICs) deducted at source from their income. The 'fee-payer' (usually the agency or end client depending on the contractual chain) is responsible for deducting the relevant tax and NICs on behalf of the worker, prior to paying the PSC's fee.

These changes follow similar rules regarding ‘off-payroll’ workers in the public sector which came into force in 2017. The Autumn Budget 2018 announced that the off-payroll rules in the public sector would be extended to the private sector as of April 2021.

For agencies/hiring organisations: taking steps to understand the contractor workforce from an IR35 perspective is imperative to help you understand these new processes and responsibilities.

For contractors, it is important to understand your rights and obligations under the new rules.

Understanding the IR35 changes for contractors

Since reform was introduced in the Autumn Statement 2016 (following on from the consultations of 2015 and 2016), industry professionals and the contracting community have long deemed the rules as a test bed for rolling out to the private sector as well. There were numerous indications that the off-payroll working rules in the public sector would be extended into the private sector. HMRC officials including Jim Harra, IR35 Forum members, and Government representatives including Mel Stride, suggested that the public sector rules have been successful with minimal if any negative impact.

The introduction of the new off-payroll working rules brings with it new obligations and a shift in responsibilities, these are changes we have also seen reflected within the public sector rules. Key points of these changes include:

Small clients exempt

Small private sector businesses are excluded from applying the rules so contractors engaged to a small company will need to assess their own IR35 status.

 A small company is defined as such which satisfies two or more of the following requirements, as per the Companies Act 2006:

1. has an aggregate turnover less than £10.2million
2. has an aggregate balance sheet total less than £6.1million
3. has less than 50 employees

Status determination statements

Hiring organisations are required to provide a 'status determination statement' to both the contractor and next party in the chain to be passed to the fee-payer.

The 'status determination statement' must include both the status decision that was made, as well as the reasoning behind it.

Beyond these criteria, HMRC have offered no further guidance as to what this should look like, however we expect to see examples of the key status tests and the manner in which the decision was made e.g. if CEST was used.

Client-led disagreement process

The introduction of a "client-led status disagreement process" now means that the client must respond to any dispute within 45 days, with both the decision and reasoning. Whilst this provides a contractor with the opportunity to present evidence against a determination, it ultimately removes a contractor's ability to appeal via ADR or to a tax tribunal.

Obligation-based liability

Liability as the fee-payer is dependent on the meeting of obligations e.g. until such time as the client provides an appropriate status determination statement, the client will be deemed the fee-payer and therefore liable.

Off-Payroll rules in practice

Despite numerous reports of businesses banning the use of contractors, or blanket applying an inside IR35 status - particularly in the finance sector - our experience in speaking with end clients and recruitment agencies was that businesses began taking the time to be fair and pragmatic in their response to the changes implemented in April 2021.

Whilst there are some slight differences in the processes taken.

What impact has IR35 reform had on contractors?

• Roles are now advertised with a preliminary status – In the public sector, and now the private sector, agencies and clients advertise roles with an expected IR35 status.
  
  
• Clients assess your status – Before commencing the contract, your client will assess your status. Reasonable care must be taken in this assessment. Clients will usually utilise HMRC’s CEST (Check Employment Status for Tax) tool or a third party like Qdos Status Review. In some circumstances however, the status will be determined on limited factors such as the role as opposed to you as an individual.
  
  

• Clients provide you with a status determination statement – Before commencing the contract, end clients must provide you with a ‘status determination statement’, which says whether or not they believe IR35 applies as well as why. This will also be passed along the supply chain to the fee-payer. Until such time as your client provides this to you, the client will be considered to have failed in their obligations and will therefore be liable.
  
  
• If inside IR35, the fee-payer will make any necessary deductions – Upon receiving the determination statement, if the result is that you are inside IR35 (considered employed for tax purposes), your fee-payer (usually recruitment agency) will become your ‘deemed employer’ and will be required to deduct the relevant tax and national insurance contributions before paying you. Some recruitment agencies may choose not to engage in this manner and instead require contractors to engage via an umbrella company or alternative arrangement. They should discuss this with you at the outset.

Steps you can take

As with the public sector reform, the responsibility for determining your tax status is passed on to your end client if you are engaging with a medium or large sized business, and inside IR35 determinations place you onto their or your agency’s payroll; If you are engaging with a small business then this process remains with the contractor themselves. In some instances, the agency-end client will only accept contractors operating through umbrella companies or other trading styles.

This lack of control puts contractors in a difficult position for ‘what to do’:

• Open up a Dialogue with Your Agency/End-Client – Understanding their intentions is the first step. Your tax status is no longer your responsibility, so speaking with your end user/agency is the best way of determining what will happen and how it will happen.
  
  
• Encourage Your End-Client/Agency to Speak with Qdos – The compliance management system put in place requires the end client and agency to be on board with the process, which means whilst it would provide a fair and pragmatic solution to the reform, you can’t use it without your client and agency including it into their processes for implementing the rules. A number of agencies/clients we work with for the public sector have been referred to us by their contractors, so encouraging them to speak to us may help you in the long run.
  
  
• Check Your Status – Whilst we don’t recommend using the CEST tool in general (due to clear biases and purposefully neglected key status tests), it is likely to be the first port of call for many end clients. Using this tool will give you a heads up of what your result will or expect to be (remember that you may have differing opinions on how some of the questions are answered). You may also want to have an independent IR35 contract review completed for the same reasons.
  
  

If you are engaged to a small business you remain responsible for your IR35 status, meaning you continue to determine your own status as normal with no changes.