IR35 is finally upon us. Our employment taxes expert Daniel Kelly recaps on the new legislation.
Any hopes for a further delay to the introduction of the off-payroll working (known as IR35) rules were dashed in the budget. They came into effect for medium and large sized private sector organisations on 6 April 2021.
For consultants engaged via their personal service company (PSC), the obligation to assess the employment status of that engagement moves to the end user organisation (the company receiving the consultant’s services).
Where that status is assessed to be ’employment’, all payroll obligations and NIC liabilities move from the consultant’s PSC to either the end user or the intermediary who pays the PSC.
The new rules significantly increase the compliance burden and potential risks associated with engaging contractors. The work required should not be underestimated.
How to assess employment status
Organisations must assess the employment status of a contractor “with reasonable care”, formally documenting their assessment using accepted employment status indicators in a status determination statement (SDS).
This may mean investing in training for those completing SDSs or seeking support from a third party advisor more familiar with the subjective nature of employment status.
HMRC’s CEST online tool is expected to be the most popular way for organisations to complete the assessments. But problems remain with the assessments made by CEST and many organisations are instead using one of the many independent assessment tools on the market.
Why your supply chain matters
The new rules apply regardless of whether you directly contract with a contractor’s PSC or via another intermediary. If there’s a PSC in the labour supply chain, the end user organisation must complete an SDS.
Where other intermediaries are involved in the supply chain, an end user is only obliged to communicate the SDS to the contractor and the first intermediary in that chain. Payroll and NIC obligations rest with the last intermediary in the chain – who pays the PSC.
Where the services of a contractor involve a chain of intermediaries, the end user organisation may not even know a PSC is being used. So, understanding the labour supply chain is going to be vital for compliance.
What if there is disagreement?
End users must complete an SDS and send it to the contractor and any intermediaries in the supply chain before the first payment for services under the engagement is made. Contractors and/or the intermediary deemed to be the employer (who pays the PSC) can dispute the employment status assessed by the end user.
Organisations must have a process for dealing with disputes within 45 days of receipt. They aren’t obliged to change their assessments if disputed but should re-visit the original SDS in light of any new information or documentation provided.
What does ‘small’ mean?
It’s important to note that small businesses are exempt from the legislation, and won’t need to apply the new off-payroll working rules. A business is small if it meets two of the three criteria – considered on a global consolidated basis:
- Annual turnover less than £10.2 million
- Gross assets less than £5.1 million
- Average number of no more than 50 employees for the company’s/group’s financial year.
It’s the size of the end user organisation that is relevant for the application of the new rules, but not so for any intermediaries.
Small companies continue to be governed by the existing legislation which places all obligations for assessing employment status and operating payroll, where necessary, on the PSC.
Contracting consultants directly
One point which seems to have been lost is that the new rules do not apply to contractors who are engaged directly, not through a PSC. It has long been the case that the engaging company assesses the employment status of the contractor and operates payroll where appropriate. These rules remain unchanged.
Immediate actions
Companies should take the following actions to manage the Off-Payroll Working rules that came into effect on 6 April 2021:
- Identify current engagements involving PSCs
- Assess employment status of these engagements and issue SDS
- Design and communicate dispute process to contractors
- Plan payrolling requirements for any deemed employment payments post 6 April
- Assign responsibilities for maintaining compliance and assess any training requirements
- Ensure contractual arrangements with contractors and/or agencies account for Off-Payroll Working obligations