Date posted: 31st Mar 2021
IR35 legislation was brought in to ensure that individuals acting as contractors/using intermediaries but in reality, working like any other employee, pay the same levels of tax and national insurance as those directly employed.
Further to that, the ‘employers’ also pay their part of national insurance, resulting in much bigger tax contributions on both sides.
IR35 – What’s Old…
Up to April 2021 the contractors decided for themselves if IR-35 applied and paid over taxes accordingly. Given the tax breaks enjoyed by entrepreneurs over employees, unsurprisingly a lot of freelancers and contractors did not see themselves as employees, and many rightly so.
The exception was for public sector clients: From 2017 they were required to assess the employment status of contractors working for them.
From 6 April 2021 (originally 2020 but delayed due to Covid-19) responsibility for employment status assessment moves from the contractor to the client, where they are medium to large private sector businesses.
Perhaps even more significantly whoever pays the contractor is now responsible for deducting employment taxes (when IR35 applies) before settling the bills.
‘Small’ businesses’ are exempt – contractors they use remain liable for determining their own employment status.
Buyer & Seller Beware
If you are a service-based contractor working like an employee (whether you agree or not), you may no longer decide your own employment status for your bigger clients.
If you’re the client, you will need new systems to make the assessments, and to provide them to your contractors.
If you are the ‘fee-payer’ you will have to collect and account for any taxes due to HMRC.
It is expected that this change will lead to a significant number of contractors having bigger tax bills as HMRC estimates only 10% correctly determine their status.
It is also likely to lead to a significant number of disagreements between both parties, and will probably result is some contracts ending, or needing to be re-negotiated.
Assessing Employment Status
Deciding employment status can be complicated with plenty of ‘grey area’. There are key factors considered by HMRC including: substitution rights (ability to switch who does the work), levels of client or worker control over how the job is done, who undertakes the financial risk, and something called ‘mutuality of obligation’, that when taken together decide the balance of employee or not.
Using The ‘CEST’ Tool?
Businesses can refer to HMRCs ‘Check Employment Status for Tax’ tool (CEST) on the GOV.UK website. It’s not always correct (this has been controversial in some cases) but may provide some guidance as to how HMRC decides.
This website also lists lots of resources to support clients and contractors with assessment and communicating the changes:
The bottom line is extra work for business, but with the exchequer cash strapped these days more than ever HMRC probably view it as good timing.
Penalties And A Soft Landing
In February 2021, HMRC confirmed that companies will not have to pay penalties on any inaccuracies within the first 12 months of the new rules, unless there is “clear evidence of deliberate non-compliance”. After that there are penalties for getting it wrong.
Affected businesses need to be able to show they’ve taken reasonable care and made reasonable decisions when reviewing their non-PAYE workers. Firms cannot adopt ‘blanket’ policies and must assess on a case-by-case basis.
Are You Ready?
Have you checked if you are affected by the changes? We can provide support to both workers and business in understanding the changes to status evaluations and in making the right payments to HMRC.
Please get in touch if we can help.
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