The UK Government is introducing new rules that take effect from 6 April 2021 to tackle payroll non-compliance. These are known as the IR35 rules.

The reforms were due to be introduced in April 2020, but the outbreak of coronavirus led to the deferral of the implementation until April 2021. The new rules will affect medium and large businesses that engage individuals to work for them through an intermediary such as the individual’s own limited company.

• The new rules transfer the obligation to review the IR35 status from the underlying worker to the engaging end client.
• It can result in payments to contractors needing to be paid via a UK payroll.
• It affects payments for services performed after 6 April 2021.

Many businesses will need to invest considerable resource and time in order to ensure that the adhere to the new rules and enable business to continue without disruption.

At the end of this document there is a schedule explaining some key technical terms that you need to understand:

IR35 is designed to assess whether a contractor is a genuine contractor rather than a “disguised” employee for the purposes of paying tax.

For IR35 tax rules to apply the individual worker must personally perform a service for an end user / client through an intermediary. The intermediary can be a PSC, limited company, agency or partnership.

Previously it was the contractor and their intermediary who had to determine their IR35 status.

From 6 April 2021 the new rules transfer the obligation to review the IR35 status from the underlying worker to the end client.

The new rules mean that the end client will have to issue an SDS. This states who is liable for any IR35 tax and National Insurance Contributions (NIC).

The actual IR35 tests are not changing, but:

• Who is liable for paying the tax and NIC will change for “large clients”; and
• Contractors will be allowed to challenge their SDSs.

Large businesses will have to decide whether or not a worker is liable for IR35. The end client informs the worker how they have been categorised via the SDS. The SDS also sets out the reasons for the decision.

If the worker is assessed as being employed for tax purposes, the entity nearest the PSC / intermediary in the labour supply chain will need to make deductions for tax and NIC and withhold these from the contractor’s fees.

• Engaging contractors directly through a PSC

  If you engage workers directly through a PSC, you will become responsible for payroll taxes.

  This means that you will deduct income tax and employee NIC from the gross payment to the PSC. You must also pay employer’s NIC (currently 13.8%) on top of the fee paid to the PSC as well as the Apprenticeship Levy (0.5%) if applicable.

• Engaging workers through an agency

  If you hire staff through an agency, you will issue the SDS to the agency as well as the contractor. This passes the responsibility for dealing with employment taxes to the agency.

  You make payments to the agency as normal.

Any company that is not “small” or part of a “small group” is caught by the rules.

For a UK subsidiary company, we look at the size of the worldwide group to which it belongs in order to determine whether the rules apply.

A standalone company is exempt if it is below two of the criteria below.

A group company is exempt if the consolidated results of the worldwide group are below two of the criteria below.

The size criteria are as follows:

• Gross Assets are defined as before any deduction for liabilities. This is effectively the Aktiva side of the balance sheet, as per the continental European balance sheet presentation.
• The criteria will have to be met or exceeded for two consecutive years for the group to become small or go from small to not small.

You must issue an SDS in line with the requirements set out above.

In most cases there is only one intermediary in the supply chain, which will also be the fee-payer. However, in longer supply chains, this may not be the case and the next party in the chain will be responsible for passing the statement up the chain until it reaches the fee-payer.

Until you have completed the steps outlined above, you will be considered the fee-payer and therefore liable for any taxes due.

The IR35 rules take precedence over CIS.

Please note the different meaning of “Contractor” for CIS and IR35 legislation.

A CIS contractor is the entity engaging subcontractors to undertake work for them.

An IR35 contractor is the individual, ie the subcontractor in CIS terminology.

• Be prepared for challenges by workers who disagree with their status determinations.
• Where contractors accept employment status, be ready to deal with claims to backdated holiday and sick pay, among other benefits.
• Be prepared to deal with contractors renegotiating contracts.

Client / End Client / End User

The entity for whom the worker provides their services.

Contractor or worker

The individual who personally performs the services for the end-user via an intermediary.

PSC

A personal service company.

Fee payer

The party next to the PSC in the supply chain. They will be responsible for any payroll obligations and additional costs.

Status Determination Statement (SDS)

The SDS should be in the form of a document or email, but must be in writing and must provide both:

1. The status decision; and
2. The reasons behind the decision.

The statement must be provided to:

1. The individual contractor being engaged; and
2. The next party in the supply chain, e.g. the PSC or agency.

1. Review your supply chain and identify all contractors you use who are physically in the UK.

   You may need to speak to your HR, purchasing and procurement departments.

2. Determine how you currently purchase the services of each contractor. This could be:
   • Directly from an individual.
   • Through a PSC.
   • Through an “umbrella” employment company.
   • Through an agency.

   Where you contract directly with an individual you should already be determining whether they are an employee or self-employed.

3. Assess whether each contractor is within the IR35 legislation.

   HMRC has an online tool (CEST – Check Employment Status for Tax) to assist in carrying out the assessment. However this tool is designed to only give an indication of the employment status and cannot be relied upon. The tool may also not give conclusive results in all cases.

4. Issue an SDS to each contractor and the intermediary.
5. For the contractors which are within the IR35 rules from 6 April 2021 they must be paid via a payroll.
   • For contractors using a PSC, the end client must include the individual on the end client’s payroll.
   • For contractors hired through an agency, the agent must include the individual on the agent’s payroll.
6. If a contractor is found to be within IR35, they can appeal the decision within 45 days.

   A process must be established to manage the appeals process for your contractors.

7. The SDS determinations must be reviewed annually.

Türner & Co can:

• Provide you with assistance to determine the IR35 status of your contractors
• Produce the SDS for you
• Provide payroll services to you if required
• Help you to manage the appeals process for SDS

For more information contact Christine Turner: Christine.turner@tuerner.com