Changes to the off-payroll working rules (IR35) – They haven’t gone away
Businesses have less than 3 months to prepare for the new rules with no further postponement expected
Changes to how the IR35 rules are applied to off-payroll workers in the private sector – postponed last year due to the Covid pandemic – are expected to come into effect from 6th April 2021.
Despite the current third lockdown and ongoing disruption and restrictions on business, Ministers and HM Revenue & Customs have failed to listen to calls from businesses to postpone the changes again. Clients should assume there will be no further delay and ensure that they now plan for how the changes will affect them.
The new rules do not change the definition of who is and isn’t an employee, and nor do they extend the scope of which contracts may be caught by IR35 rules and treated as “deemed employment”. But what the new rules do is change both who has the responsibility for determining if IR35 applies and who is responsible for deducting and paying tax in situations when it does.
End users and contractors
The new rules will only apply where the client (the end user) is a medium or large sized business. A business is large or medium sized if any two of the following conditions are met:
- Annual turnover in excess of £10.2m
- Balance sheet total of more than £5.1m (meaning assets before liabilities)
- More than 50 employees
Different conditions apply for sole traders, partnerships and connected companies. If a parent company in a group is large or medium sized then the rules will automatically apply to all of its subsidiaries, regardless of their individual size.
End users will need to consider the rules for every worker that is engaged or provided through an intermediary, including agencies and umbrella companies.
The rules do not apply to any worker engaged directly by an end user on a self-employed basis or who is dealt with through the end users’ payroll. The end user will need to consider if, had the worker been engaged directly, the relationship would have been one of deemed employment and therefore within the scope of the IR35 provisions, or not. Documentary evidence supporting the reasons behind the decision will need to be kept.
End users must then issue a Status Declaration Statement (“SDS”) to both the intermediary organisation which the end user has a contractual relationship with and the worker. The worker has the right to appeal against any decision made by the end user and, should HMRC consider that a business did not exercise reasonable care in reaching its decision, it could be held liable for any PAYE and National Insurance on the payments made.
If the SDS issued by the end user is one of “employment” then all businesses in the contractual chain will also need to establish who is to be treated under the new rules as the “fee payer”. The fee payer is the organisation who pays the intermediary immediately above the worker in the contractual chain, so this could be any party from the end user themselves down to an agency or an umbrella. The SDS must be passed down through the contractual chain to the fee payer who will be now be obliged, with an “employment” SDS, to operate deductions of PAYE and National Insurance from the payments that they make.
Personal Service Companies & Workers
Personal service companies may now find that the amounts payable to them will be subject to deductions at source if an “employment” SDS has been issued by their ultimate client. This may have a significant impact on both cashflow and, ultimately, the levels of net income to be received by the worker (typically the Director).
- All businesses in the contractual chain should establish if the new arrangements will apply to them
- End user businesses must review the contractual and working arrangements for off-payroll workers and prepare to issue Status Declaration Statements
- If the SDS is employment, all businesses in the contractual chain should establish who will be designated as the fee payer
- The fee payer must put in place arrangements to operate PAYE and make deductions from the payments to the final intermediary
- The worker should consider if they feel there are grounds to appeal to their end user client if they disagree with the SDS or alternatively if they need to consider renegotiating the terms or value of their contract
- Personal service companies and their Directors should consider the impact of the new rules on their current structures, arrangements, and remuneration planning
WMT has the experience and expertise to help and assist you prepare for these changes and address all of the action steps.
Please speak to your usual WMT Partner or Manager to discuss the IR35 changes and the impact on your business.