A hot topic that many of our contractor clients have been asking us about lately. IR35 regulations have been in place for a long time and these regulations were intended to discourage individuals from setting themselves up as a self-employed ‘business’ (‘off-payroll working’) when in fact their work circumstances were more like those of an employee. Both the individual and the organisation that they provide services to benefit from paying lower taxes by operating as a business rather than an employee.
The regulations haven’t really succeeded in detering and identifying those who should be employed rather than operating as a limited company, mainly because it can be very difficult to distinguish between genuine self-employment and employment roles, particularly for contractors who regularly move from role to role and are engaged to work on specific projects. Up until now the onus has been on the individual to determine whether they are ‘inside’ IR35, i.e., a deemed employee, or whether they fall outside of the regulations and can therefore pay taxes as if they were self-employed.
As of 6 April 2021 (now deferred by one year from the original implementation date of 6 April 2020), the onus for this determination transfers to the hirer, i.e., the companies engaging these individuals. These rules changes were already introduced in the public sector in 2017 and they will now be rolled out to medium and large companies in the private sector. Small companies that meet two of the following three criteria will be exempt from the change in regulations: (a) annual turnover of more than £10.2 million (b) a balance sheet total of £5.1 million or more and (c) more than 50 employees.
Before the deferral to April 2021 was announced, as we got closer to the original implementation date of 6 April 2020, we saw many larger companies taking a very conservative stance on this and refusing to renew contracts beyond 6 April 2020 if they involved paying an individual into a limited company or a ‘personal service company’ (PSC), instead engaging individuals on a PAYE basis only, either directly or via an umbrella company or agency. Some had begun terminating their relationship with the contractors altogether while others were simply undecided, leaving contractors unsure of their tax position. The deferral to 6 April 2021 now buys them more time to plan and hopefully to stop them making ‘blanket decisions’ about all contractors.
If you are affected by these rules changes, then it is the end hirer or organisation you are providing services to that is responsible for determining your employment status from 6 April 2021. They must provide you with a ‘Status Determination Statement’ (SDS) to outline the determination they have made about your employment status and the reasons behind that determination. It would also be a good idea for contractors to use HMRC’s ‘Check Employment Status Tool‘ (CEST) which will help with the determination, though we have found that in many cases the tool isn’t able to reach a determination. HMRC also have a useful factsheet with further guidance and links for contractors.