Off-payroll Working Reforms (IR35) Rules Take Effect April 2021

Off-payroll Working Reforms (IR35) Rules Take Effect April 2021

On 6 April 2021, major changes to the off-payroll working rules, known as IR35, are set to be introduced, following a 12-month delay due to the COVID-19 pandemic.

IR35 was initially introduced in 2000 to ensure that someone working like an employee but through their own intermediary pays broadly the same tax as someone employed directly. The reforms were announced as part of the 2018 Budget in an effort to tackle non-compliance, something which is forecast to cost the Exchequer £1.3 billion a year by 2023-2024.

As we've previously explained, IR35 is a significant issue that has the potential to impact all areas of an organisation’s labour supply chain, from recruitment agencies to an organisation’s HR, finance and payroll departments. It is therefore essential that contractors ensure they’re IR35 compliant and anyone who uses the services of a contractor must also understand the new requirements.

Does IR35 apply to me?

Off-payroll working rules, or IR35, apply if a worker provides their services through their own limited company or another type of intermediary to the client. Other intermediaries could include a partnership, personal service company or an individual.

You may be affected by these rules if you are a worker who provides their services through their intermediary, a client who receives services from a worker through their intermediary, or an agency providing workers’ services through their intermediary.

Off-payroll working rules apply on a contract-by-contract basis. A worker may have some contracts which fall within the off-payroll working rules and some which do not. However, from 6 April 2021 the way the rules will be applied will also change and responsibility no longer lies solely with the contractor. Read our blog post for more details on whether you'll be impacted by IR35.

What are the new rules?

Previously if your client was in the public sector, it would be their responsibility to decide your employment status. Conversely, in the private sector it would be your intermediary’s responsibility to decide your own employment status for each contract.

However, from 6 April 2021 all public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply to each contractor.

If your client determines that your contract is not within the scope of IR35, you can continue to be paid gross. If, however, you are assessed as inside the off-payroll working rules and so you are deemed an employee for tax purposes then your client, or the agency who pays your fees, will also be responsible for operating PAYE and deducting employee NICs on the fees it pays to your intermediary (excluding VAT). The fee payer must also pay employer NICs and, where applicable, the apprenticeship levy. You will still need to submit a tax return, but relief is available on the tax already paid.

It should be noted that for the tax year 2020 to 2021, your limited company or other intermediary will remain responsible for operating the off-payroll working rules and accounting for and paying the relevant Income Tax and NICs.

If you contract for a public authority, they will now need to provide you with a ‘Status Determination Statement’ setting out their decision about whether the off-payroll working rules apply. This written document must provide the status decision made by the hiring organisation and the reasons behind that decision. It must also be provided both to the contractor being engaged and the next party in the supply chain, such as a recruitment agency, if applicable.

If you provide services to a small client in the private sector, your intermediary will remain responsible for deciding the employment status and if the rules apply.

If you are unsure whether your client is classed as small, you have the right to request information from them about the size of their organisation.

These changes do not affect whether you can work through your own limited company, however the way Income Tax and NICs are calculated and paid may change and some clients may change the way they wish to engage contractors.

IR35 status tests

There are a number of tests that can be considered to determine a worker’s IR35 status. So, for example, contractors who are appointed as ‘office holders’ and take on management roles in their client’s business must apply for IR35. However, if a contractor is providing a service rather than specific skills and so could sub-contract someone else to provide that service, they would be deemed to be self employed. 

Other factors such as how a person is paid and if they can be dismissed will also factor into defining whether they should be classed as employed or self employed. For example, payment on an hourly, weekly or monthly basis would generally be associated with employment, whereas a self-employed individual will more likely negotiate a rate for a job, invoice for the work done and be responsible for their own expenses. Similarly, it wouldn’t be expected that a self-employed person could be dismissed – unless they were in breach of their contract. HMRC typically views notice periods as a sign of employment.

Ensuring IR35 compliance

Being IR35 compliant isn’t a one-off task so it’s important to review each contract to determine its status and conduct regular reassessments to ensure circumstances haven’t changed. Also be sure to check that your contract accurately reflects your working practices. Any IR35 enquiry from HMRC will begin with a request for access to your contract so this is a key document to maintain.

IR35 may seem like just another burden on top of the difficulties many self-employed workers have faced this year, but it’s important to prioritise it. Non-compliance could result in not just having to spend significant amounts of time responding to an enquiry from HMRC, but it could also leave you with a hefty bill for unpaid taxes.

Further Reading

Key Takeaways from Spring Budget 2023: Corporation Tax Rises and Investment Zones

Autumn Budget 2021: Five Key Announcements for Small Businesses

Budget 2021: What It Means for Small Businesses