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.
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 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
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.
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.
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.
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.
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’:
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.
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