IR35 tax legislation changes for Contractors: April 2021
What is IR35
IR35 (also known as the ‘off-payroll rules’ or the ’Intermediaries Legislation’) is a tax regime for contractors, introduced in 2000, that was designed to make sure everyone that does the same job in the same manner pays similar income tax and national insurance.
Where a contractor’s assignment is assessed to be ‘inside of IR35’ (which means that the contractor’s working arrangements have similar key features to that of an employee), income tax and national insurance must be deducted from the contractor’s pay.
When the legislation was first introduced, it was the contractor’s Personal Service Company (PSC) that was responsible for assessing whether the contractor was inside or outside of IR35 and to make the required tax deductions.
The Government’s view at that time was that a significant percentage of contractors were not assessing and paying tax correctly. In response to this perceived tax deficit, they introduced reforms in 2017 for the Public Sector and in 2021 for the Private Sector.
The 2017 & 2021 reforms
From April 2017 in the Public Sector and April 2021 in the Private Sector, the responsibility for determining whether a contractor’s assignment fell ‘inside’ or ‘outside’ of IR35 passed to the end-client who receives the contractor’s services.
The responsibility for deducting and paying tax from the contractor’s pay also moved to the party which pays the contractor’s limited company (usually, this will be an employment agency).
The change does not apply where the end-client is a small company, which means a company which meets any 2 of the following criteria:
- Annual turnover of not more than £10.2 million;
- A balance sheet total of not more than £5.1 million;,
- No more than 50 employees. Where the end-client is a small company, the responsibility for assessing and paying tax will stay with the contractor’s limited company.
The size of the employment agency, if one is involved, is not relevant.
What does this mean for contractors?
The IR35 reforms only apply to Limited Company contractors - if you work via a PAYE or Umbrella model, they do not affect you.
All new contractor assignments now need to specify whether the assignment is inside or outside of IR35 before the start date. Resourcing Solutions will make the status of the assignment clear to you when discussing contracting opportunities.
How does a client make an IR35 determination?
In order for a worker to be inside of IR35, all of the following three factors must apply:
- 1. The worker must be providing Personal Service to the client
- 2. There must be Mutuality of Obligation between the parties
- 3. There must be a sufficient degree of Control over the worker to establish a master/servant relationship
Where any of these three factors are not present, the worker will be outside of IR35. Other factors which are relevant in assessing the worker’s IR35 status are:
- 4. Whether there is sufficient integration of the worker into the client’s business
- 5. Whether the worker is in business on their own account (or whether they have Business Dependency in respect of the client)
Is my assignment inside IR35?
The Check Employment Status for Tax (CEST) tool is designed to help determine whether an assignment is inside or outside of IR35.
The Government’s IR35 help service is also available if CEST does not provide a clear answer:
Phone: 0300 123 2326
However, it is up to the end-client to determine IR35 status and they may opt to use alternative tools/methods to make their decision.
Historically, CEST has been criticised by various industry bodies and lobby groups, so HMRC has now issued an updated version of the tool and additional guidance to help answer the questions accurately. The new tool is more user-friendly and allows users to save a CEST output, evidencing the determination for future audit purposes (which can also be used as a Status Determination Statement for the purposes of complying with the IR35 legislation). However, whilst HMRC stands by the tool, it is still viewed critically and it is widely questioned whether it produces outputs in-line with case law.
Disagree with the client's status findings?
The legislation requires end-clients to provide a ‘status disagreement process’ for contractors to challenge their IR35 determination.
End-clients are obliged to provide contractors with an IR35 determination, stating whether their assignment is inside or outside of IR35, and written reasons for the determination. If a contractor disagrees with the determination, they have the right to make representations to the end-client about why they believe the determination is incorrect and the end-client has 45 days to consider these and either change its determination or give its reasons for deciding that the original determination was correct.
Changes in the public sector
The changes to the rules for Private Sector contractors in 2021 largely mirror the existing IR35 regime in the Public Sector, which has been in place since April 2017.
The Government has announced that the same rules will apply to contractors working in both the public and the private sectors from April 2021, which means that there were some minor changes to the Public Sector regime, as follows:
- The end-client is now required to provide the next party in the chain with a written IR35 determination and written reasons, which must then be passed down the contractual chain until it reaches the contractor.
- The end-client is also required to provide the contractor with the written IR35 determination directly and provide written reasons to the contractor on request.
- The end-client is required to provide the contractor with the right to appeal against the IR35 determination.