Many of us have by now heard of the changes to the IR35 legislation due to come into force on 6 April 2021 (‘the New Rules’).
The New Rules have been widely reported in recent months, so you can be forgiven for feeling a little IR35 fatigue. However, these are important changes that impacted businesses can’t afford to ignore. In this article, we take a look at the ‘small print’ – those lesser known details about the New Rules that you may not already be aware of.
When does IR35 apply?
1. IR35 only applies if you engage with a self-employed contractor via their personal service company. If there is no personal service company, IR35 does not apply. So what is a personal service company?
A personal service company is a company in which the contractor has a ‘material interest’. A material interest means having the beneficial ownership or the ability to control more than 5% of the ordinary share capital of the company, having an entitlement to more than 5% of any distributions made by that company, or having an entitlement to receive more than 5% of the company’s assets on winding up.
Do the New Rules apply to my organisation?
2. The New Rules only apply where the client is a medium or large company. A medium or large company is a company with two or more of the following:
A turnover of more than £10.2million;
A balance sheet of more than £5.1 million; and
An average of more than 50 employees.
How do I work out if my company meets these criteria?
3. To work out if your company meets these criteria, you need to take into account the following:-
A company will only be considered medium or large if it has met two or more of the criteria for at least two consecutive financial years;
The relevant year for a company to consider is the last financial year before the beginning of the tax year 6 April 2021;
When considering the number of employees, a company must look at the average number of employees employed during the course of the relevant financial year. This involves identifying the number of employees each month, totalling this up, and dividing the total figure by the number of months in the relevant financial year; and
A Company’s size is determined by the size of its parent company. So, if it is part of a group of companies, the figures from all of the companies within that group must be aggregated together – even if one of those companies is based overseas.
There are exceptions for companies in their first financial year following incorporation – even if they are part of a larger group.
4. There are similar rules for LLP’s, unregistered companies and non-corporate entities – it is not just registered companies that will be caught by the New Rules.
Are there any engagements which fall outside of the New Rules?
5. The New Rules do not apply to contracted-out services. This can be difficult to identify in practice, but typically a fully contracted out service will involve the provision of goods and material as well as labour. A service provider will have an opportunity for profit beyond taking a percentage of the worker’s fee.
My Company sources consultants through an employment business – will the New Rules apply?
6. Yes – if the Company in receipt of the services (the Client) is a large or medium company, the rules will still apply and the Client will have to make a ‘Statement Determination Statement’ or ‘SDS’ (a written decision on whether the contract is inside or outside IR35), and pass this to the contractor and employment business. However, the employment business paying the contractor’s fees will have the responsibility for making any tax and national insurance deductions.
What processes should end user clients have in place?
7. A contractor has the right to ask the Client whether the contract will fall within the New Rules, and if so the Client must respond within 45 days. HMRC has produced a template response form that companies can use.
8. The New Rules will apply where both the payment and the services are provided on or after 6 April 2021. In some cases, a payment made on or after 6 April 2021 will apply to services provided both before and after 6 April 2021 – Clients will need to have systems in place to pro-rata the tax deductions accordingly.
9. The SDS must be undertaken with reasonable care. This means, among other things, ensuring those undertaking them are properly trained, that each contract is looked at on a case by case basis (no blanket decision making) and that decisions are based on all relevant information. Clients should ensure there is a process in place for gathering the correct information and then passing the SDS down the supply chain to the contractor.
10. The SDS must be reviewed whenever there is a change to the way in which the services are performed or the terms upon which the contractor is engaged. Therefore, Clients must undertake regular reviews of their contracts throughout the life of an engagement and have adequate processes in place to detect any changes.
11. Contractors can challenge the SDS. If a challenge is raised, the Client must provide a written and reasoned response within 45 days from the date of the challenge. Failure to do so will result in the Client being liable to account to HMRC for any tax and national insurance payments due, even if these have already been paid by someone else. Clients should ensure they have adequate processes in place to deal with any challenges and disputes.
Do the New Rules apply if the Client is based overseas?
12. The New Rules can still apply if the Client, the agency or the worker’s PSC is based overseas.
What should companies be doing now?
We are currently working with clients to prepare for the New Rules by providing the following assistance:
Labour supply chain audits – identifying whether the rules apply, who to, and the client’s risk exposure;
Contractor Engagement Reviews – for clients with particularly valuable contractors we can provide an IR35 assessment including a bespoke ‘traffic light’ report outlining the IR35 risks and how these can be mitigated;
SDS drafting – we can prepare and draft these on your behalf;
SDS tools and training – we can provide clients with the tools and knowledge they need to undertake their own SDS’s with confidence through our tailor made templates and training; and
Contractor disputes – we can assist with any challenges raised by your contractors.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.