April 2021 – Navigating the changes to off payroll rules
Do you engage with Limited Company contractors to complete project roles within your business, or other organisations? Are you prepared for April 2021’s IR35 legislation changes? In this guide we highlight the top line on IR35, what your obligations are, and how you can continue to get the very best out of your contractor workforce.
What is IR35?
IR35 is a tax legislation designed to ensure contractors pay the correct amount of tax. If a contractor is ‘inside’ IR35, they are considered a disguised employee by HMRC, and must be taxed in the same way as a permanent employee would be. If a contractor is ‘outside’ IR35 then HMRC considers them to be truly self-employed, and will be entitled to structure their remuneration so as to benefit from the lower rates of tax which apply to dividend income. They’ll also be entitled to the various other tax benefits which are only available to the truly self-employed. Trading as a Limited Company and working ‘outside’ IR35 can result in a higher take home pay than say that of an Umbrella company agreement, which is why contractors prefer to work this way.
Who decides on a contractor’s IR35 status?
For Public sector contracts, the end-hirer / client is responsible for assessing and determining a contractor’s IR35 status, and therefore bares the tax risk should they get the assessment wrong or not take reasonable care during the process. Until April 2021 all Private sector contracts IR35 statuses are determined by the contractor themselves. And just as for Public contracts, should they get their status wrong, must pay the associated and costs.
What’s changing in April 2021?
HMRC will align both Public and Private contracts, so that the end-hirer / client is the decision maker when it comes to a contractor’s IR35 status. The responsibility will be taken completely away from the contractor, regardless of whether it’s a Public or Private contract. This also means that 100% of the liability will lie with the end-hirer / client should they get it wrong.
What are a Private Sector hirer’s obligations?
Private sector hirers will be responsible for determining a contractor’s employment status, for tax. Once they have done so, they must inform the “fee payer” (usually the supplying agency) whether the contractor should be paid net or gross.
The update to legislation does not ‘outlaw’ working through a Personal Service Company (PSC). There is also no reason not to engage with independent consultants, so long as they are operating as truly self-employed, or additional tax is paid on their services. As an end-hirer or client, it is within your best interests to ensure that your contractors are confident with how you’ve determined their status, and the associated take home pay implications.
What are the implications for contractors?
Those contractors who are genuinely self-employed should be able to continue to contract as self-employed after the Private sector rule changes. Also with the correct advice from end-hirers, clients and agencies, there will also be a number of contractors who will be able to adjust their working practices and contracts to ensure they remain outside IR35. However, without this collaborative approach, or with the usage of blanket bans on the use of PSCs, end-hirers risk alienating this highly skilled, flexible and essential workforce. It’s predicted that many contractors who are caught by IR35 will want to carry on contracting in a flexible way, and end-hirers will need to engage with them in a PAYE compliant manner, such as through the usage of an Umbrella company.
What happens if the Private sector end-hirer gets it wrong?
Legislation states that when applying these new rules, Private sector end-hirers must exercise “reasonable care”. At present, and unfortunately for contractors, HMRC have provided little guidance over what constitutes as reasonable care, in the context of the new IR35 rules. However, it is generally accepted that in order to show reasonable care, the end-hirer must be able to display that they have taken the contractor’s circumstances into consideration, by undertaking a full assessment on a case-by-case basis.
HMRC has provided a tool in which to aid end-hirers come to their final conclusions. The CEST tool (Check Employment Status for Tax) works by asking a series of questions regarding the contractor’s working practices and contract, and then will come to a decision. So long as the answers given are 100% factually correct, HMRC has said that they will stand by the final decision of CEST. If end-hirers decide to take a an overly risk-adverse approach to determining contractor’s IR35 statuses they risk shutting out their workforce, which in turn may have a subsequent impact on productivity and growth. It is strongly advised that end-hirers work closely with contractors and their agencies to ensure minimum disruption.
What happens should a contractor disagree with their IR35 determination?
Once you have come to a decision regarding a contractor’s IR35 status, you will be required to produce a ‘status determination’ sheet, and provide this to the contractor if they request it. Should they disagree with your decision, we advise discussing this with them, to try and resolve any issues. If the contractor enlists the services of a contractor accountant, they may be able to provide you with IR35 review evidence, or even suggest amends which can be made to the contractor’s contract or working practices, that would support an ‘outside’ determination. As the end-hirer, you should also be prepared for contractors to discuss increasing their remuneration package, in order to compensate for any loses caused by an ‘inside’ status decision.
A contractor can also formally appeal their IR35 status, using the ‘client-led disagreement process’. Once the end-hirer or client has been informed that a contractor disagrees with their status determination, they will have 45 days to respond. If they fail to do so, the end-hirer or client will be liable for all employment taxes. If, upon a second evaluation, the contractor’s status is in fact correct, the contractor must be informed and explain the reasoning why the same decision has been reached. Should a different conclusion be reached, the contractor must again be informed, and provided with a new status determination sheet. The original copy must also be withdrawn.
What should a Private Sector hirer do to prepare?
It’s advised that the Private sector end-hirers take advice and put the required policies in place now, so that they are prepared prior to April 2021. This will enable a smooth transition into the new policy, and will be more likely to retain their contracting talent in a way which is satisfactory to all parties, plus will demonstrate to HMRC that “reasonable care” has been taken when assessing the workforce.
At Aardvark Accounting we specialise in the intricate and potentially confusing world of contractor accounting, and have the knowledge and expertise to collaborate efficiently and compliantly with agencies and end-hirers on all IR35 matters.
Our advice would be to ensure you fully understand your obligations and duties, take ‘reasonable care’ seriously, and review each case individually and on its own merits. If your contractor already works with Aardvark, they will receive the best support and advice from their personal director-level accountant, and also have the ability to switch over to our FCSA Accredited Umbrella company, should they need to.