Changes to IR35 are set to take effect in April. The government originally proposed that the IR35 reforms for the private sector would take effect in April 2020, then postponed this for 12 months to help businesses during the pandemic.
What is IR35?
IR35 is a tax anti-avoidance rule designed to prevent “disguised employment”. The intention is that individuals who are working like employees but who operate via an intermediary, such as a Personal Service Company (PSC), pay broadly the same tax and National Insurance Contributions (NIC) as an employee would.
IR35 applies when the contractor (the supplier of services) would be an employee for tax purposes if they were engaged directly by the end-user (the client). IR35 is a tax rule, it doesn’t change the contractor’s status for employment law purposes. However, it is important to have good working practices in place including robust contracts to reduce risk.
What is changing?
The reform will place the responsibility for assessing whether IR35 applies onto the end user for all payments.
Under current rules, the contractor is responsible for assessing whether IR35 applies and, if so, operating PAYE and NICs on the fees the personal services company receives (excluding VAT) less certain statutory deductions. Businesses have been able to engage contractors using a PSC (or intermediary) without having to worry about the contractor’s status for tax purposes.
Under the reforms, responsibility for assessing and determining whether IR35 applies will switch from the contractor to the end-user. If the end-user determines that IR35 applies, the responsibility for operating PAYE and NICs will move from the PSC to the entity which contracts directly with the PSC.
What actions should you be taking?
There are a number of actions businesses should be taking to prepare for these changes, including:
- reviewing contracts and how they engage contractors;
- adopting robust procedures to identify and record the use of contractors;
- establishing clear and well-communicated policies for hiring contractors;
- having a clear and consistent methodology for making status determinations and providing status determination statements (“SDS”);
- ensuring arrangements with agencies or intermediaries reflect the revised IR35 position;
- if IR35 applies, PAYE and NICs must be operated in respect of the fees paid to the personal services company.
Contractors who are providing labour through a personal services company will need to complete their tax returns for the year ending April 2021 and continue to self-assess their own IR35 status.
The reforms will apply to any payments made on or after 6 April 2021. The change will impact large and medium-sized private-sector businesses.