IR35 – Extension of the off-payroll rules to the Private Sector
As you will know, IR35 is tax legislation that applies where an individual works through an ‘intermediary’, such as a personal services company, and provides their services to an end-user client.
You will be aware that since IR35 was launched in 2000, the intermediary (the contractor’s company) has been required to make an IR35 assessment for every assignment they undertake to decide what tax rules apply.
Change in 2017
The Government changed how the IR35 rules work in the public sector from April 2017. Where the client is a public sector organisation, responsibility for making the IR35 assessment moved from the intermediary to the client. If the client decides that the intermediary is inside IR35, then the ‘fee-payer’ (the party in the chain closest to the intermediary, generally the recruitment business) must deduct tax and NI before paying the intermediary.
Extension to the Private Sector
The Government has decided that these new rules will apply to the private sector from 6 April 2021, but with some changes as explained below:
Small companies’ exemption: the rules will not apply to private sector client companies meeting any two of the following:
1. Annual turnover of not more than £10.2m,
2. Balance sheet of no more than £5.1m,
3. No more than 50 staff.
The client has to decide whether it counts as a small company.
Passing status decisions through the supply chain: the client will have to pass its IR35 decision to the contractor as well as the recruitment business. Where a supply chain is in place, all parties must pass on the client’s decision.
Check Employment Status for Tax tool (CEST): the client will have to understand the IR35 rules and use an appropriate tool to reach its decision. The Government’s online CEST tool has been criticised and is likely to be amended.
Liability: First, if the ‘fee-payer’ is off-shore, the responsibility to deduct tax and NI moves up the supply chain to the next UK-based entity. Second, it is proposed that liability should initially rest with the party that has failed to fulfil its obligations (such as making an assessment or passing on the results of an assessment) until such time as it meets its obligations, at which point liability moves down the chain. However, if HMRC cannot collect tax due from a party (for example, if the recruitment business is insolvent), the proposal is that liability moves back up the chain. The client will be liable if it fails to take reasonable care when making its assessment. It’s not clear what this means in practice.
Disputes: A contractor or a recruitment business will have the right to challenge a client’s IR35 assessment, but there is no independent appeals process.
Apart from the small companies’ exemption, these changes are also expected to be rolled out to the public sector from April 2021.
Importantly, the rules will apply whether clients engage contractors directly or through an agency.
Draft legislation to implement the new rules was published on 11 July 2019. A ‘technical consultation’ period is underway and we do not expect to see the final legislation until late 2019.
All organisations that expect to be affected (because they will be using contractors when the rules take effect next April and they will not be exempt) will need to decide how they are going to assess contractors’ IR35 status and how they will respond if their conclusion is that one or more contractors are ‘inside’ IR35.
The InterQuest Group will be working closely with our clients to make sure that appropriate assessments are carried out on all contractors who are expected to be providing services when the new rules take effect. If this affects your company you will hear more about in due course, but if you have any questions in the meantime please contact IR35enquiries@interquestgroup.com.