IR35 Factsheet

First, a brief explanation of the key IR35 terms:

IR35 Definition

End User/client: An organisation that uses the services of an Intermediary.

Intermediary: A third party (such as a personal service company) which provides a Worker is provided to an End user/client.

Worker: An individual who provides a service to the End user/client via an Intermediary.

Status Determination Statement (“SDS”): a statement that the End user/client must issue to the Worker and which:

• concludes whether the Worker is:

1. An employee for income tax purposes; or
2. Not an employee for income tax purposes

• Provides a reason for that conclusion

What is IR35?

IR35 was introduced to enable HRMC to collect additional tax and national insurance payments where a contractor is an employee in all but name. Previously individuals could seek to avoid paying tax and national insurance contributions by supplying their services through an intermediary or a personal service company, and then paying themselves in the form of dividends. IR35 aimed to effectively close this loophole.

What are the Changes?

From 6th April 2021 the IR35 rules changed so that liability will always rest with the End user/client for those working in the private sector. Previously that liability rested with the Intermediary. However, the new rules will not apply to a “small” organisation. A “small” organisation is one which satisfies at least two of the following three requirements:

• Annual turnover of not more than £10.2m.
• Balance sheet total of not more than £5.1m.
• Not more than 50 employees.

In order to comply with its responsibilities, an organisation will need to assess whether or not a Worker is an employee for tax law purposes – the tests for determining tax law status currently differ to the tests for determining employment law status. However, there are some cross-overs! When undertaking this assessment, the End user/client will need to use reasonable care and skill in considering what contractual/working arrangements are in place. On completion of the assessment, the organisation must:

1. Issue a SDS. (Until the SDS is issued, the End user/client has full responsibility for operating PAYE and accounting for NICs in respect of the Worker.)
2. Deal with any SDS appeals by the Worker in accordance with the appeals framework.
3. Make arrangements for collecting tax and national insurance where applicable.

If the Worker falls outside the IR35 regime, the Worker can continue to operate via the Intermediary and all liabilities will remain with the Intermediary.

Will an employee for employment law purposes always be an employee for tax purposes?

No!

The tests for determining status for employment law purposes differ from the tests for determining the status for tax law purposes. There are also different status categories for tax law compared to employment law. It’s therefore possible that a Worker may have a number of employment law rights whilst not being an employee for tax law purposes. This has been recently demonstrated in the gig economy cases which have made headline news (e.g. the Uber case).

What safeguards can be put in place?

To avoid being caught by the IR35 regime changes, some organisations have implemented a blanket ban on the use of off-payroll workers. In some instances, this has seen the End user/client employing all hitherto Workers – typically on fixed term contracts. Other organisations have elected to only engage Workers who are employed by an Intermediary (e.g umbrella companies, agencies and personal service companies) which employs the Worker and so makes all of the requisite income tax and NIC deductions.

What should we be doing?

Any organisation which is an End user/client should check if it is a “small” organisation; if it is, this must be kept under continual review. Any medium/large organisations should:

1. Decide whether to continue engaging Workers through an Intermediary.
2. Identify and implement a process on how status determinations will be made. The HMRC has produced a useful assessment tool which can prove to be a useful starting point.
3. Establish a SDS appeal process.
4. Identify the department(s)/person(s) who will take responsibility for undertaking assessments, issuing SDSs and dealing with any appeals.
5. Review and make any necessary changes to pay roll systems.
6. Ensure there is a paper trail of the processes followed and decisions made.

If you require further information call our Employment team on 0800 088 6004.