The upcoming changes to the “off-payroll” rules will bring the obligations regarding IR35 determinations in medium and large sized private sector organisations in line with those already in place in the public sector.
This means that, from 6 April 2021, if an organisation operates in the private sector and engages workers (or contractors) who provide their services through their own limited company (or another type of intermediary) it may be required to determine the workers’ status for tax purposes if the organisation meets two or more of the following conditions:
- It has an annual turnover of more than £10.2 million;
- It has a balance sheet total of more than £5.1 million; and/or
- It has more than 50 employees
The rules also apply if the organisation has an annual turnover of more than £10.2 million and are not a company, LLP, an unregistered company or an overseas company (“simplified test”) and there are specific rules that cover connected and associated companies. Small-sized private sector clients will not have to decide the employment status of their workers but must be able to confirm their size if asked (plus a company is always considered “small” in its first year of trading).
If an organisation falls under the heading of a medium or large private sector client, it will need to:
- determine whether IR35 applies to each and every engagement they enter into with a worker;
- take “reasonable care” when making a determination about the employment status of a worker;
- communicate the decision to the worker or, if appropriate, to the agency that it contracts with to provide the worker, using a Status Determination Statement (SDS);
- keep a record of determinations and the reasons for them, as well as records of any representations made by the worker; and
- deduct tax and national insurance from any fees payable to the worker through their intermediary if the determination is that IR35 applies.
There are many different factors that an organisation must consider when determining if the IR35 rules should apply. HMRC have provided a list of factors it considers to be the most important in determining an individual’s employment status which is a must read if you are the one making that determination. Factors such as personal service, mutuality of obligation and the right of control come high up the list of things to consider when agreeing the written terms of an assignment. However, it is equally as important that the terms reflect what happens on a day to day basis, as HMRC will consider the hypothetical contract as well as any written terms when considering if an organisation has made the correct determination.
HMRC also give guidance on what they mean by taking “reasonable care” when making a determination and unsurprisingly, the larger the employer, the larger the expectation is that a thorough and detailed analysis will be undertaken, Click here to see the guidance.
Organisations and individuals can also use HMRC’s online tool to check employment status for tax. Despite much criticism of the accuracy of a CEST determination, it is the only tool that will produce a result that HMRC will stand by, if the information input is accurate and the tool is used in accordance with guidance. CEST is therefore a very helpful tool provided of course it gives you the answer you were hoping for!
The recommendation therefore is for all private sector organisations to determine (as soon as possible) whether they are classed as a medium or large organisation, and consequently whether the obligation to make determinations regarding their workers’ tax status will kick in when the new rules come in on 6 April 2021. A review of all agreements in place with personal service companies, agencies and other intermediaries currently engaged should also be undertaken, and written terms should be put in place where they do not exist.
As with most legislative changes, early preparation is key to making the transition less disruptive for businesses and workers alike, and reduces the risk of non-compliance and the associated penalties.
Do not hesitate get in touch with a member of our team if we can assist you with this preparation or have any queries about these upcoming changes.