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Changes to the IR35 legislation, also referred to as the off-payroll working rules, are due to be implemented on 6th April 2021. We explain what the changes mean

IR35 CHANGES EXPLAINED

New rules regarding IR35 in the public sector, otherwise known as the ‘off-payroll working rules’ came into force on 6th April 2017. This will now be extended to the private sector from 6th April 2021 for medium and large businesses only.

A consultation was held in the summer of 2018 exploring options for improving IR35 compliance in the private sector, with the public sector reform as the preferred option. The ‘Summary of Responses’ document was published shortly following the Autumn Budget, confirming a further consultation to be published “in the coming months”.

The draft legislation was published July 2019 and included some refinements which will apply to both the private sector and public sector from April 2021. Whilst we don’t expect any changes, until the final legislation is published, the following explanation of reform is subject to change.

WHAT ARE THE IR35 CHANGES FROM APRIL 2021?

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

The responsibility for determining the IR35 status of a contract will shift from the limited company contractors to the private sector engagers and will be applied to services provided on or after 6th April 2021.

Private sector businesses will be responsible for determining the IR35 status of all of their off-payroll workers, whilst the fee-payer (usually a recruitment agency) will be responsible for deducting the relevant tax and National Insurance contributions at source.

Where a contractor is deemed to be ‘inside IR35’ (i.e. employed for tax purposes), the fee-payer will also be required to pay Employers NI and the Apprenticeship Levy.

Medium and large businesses hiring off-payroll workers will need to consider the rules whilst small businesses will be exempt:
“The government intends to use similar criteria to define small businesses as is found in the Companies Act 2006.”

A small business is defined as a company which satisfies two or more of the following requirements:

  1. has an aggregate net turnover less than £10.2 million
  2. has an aggregate balance sheet total less than £6.1 million
  3. has less than 50 employees

Businesses will be legally required to provide information regarding the size of the business to agencies and contractors upon request.

UNDER CURRENT RULES

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

Contractors are responsible for determining their employment status under the IR35 rules and paying the relevant tax and National Insurance

FROM 6TH APRIL 2021

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

End clients are responsible for determining the employment status of their contractors under the IR35 rules

The fee-payer is responsible for deducting the relevant tax and National Insurance contributions at source. Depending on the contractual chain, this would usually fall to either the client or recruitment agency

IR35 STATUS REVIEW

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

Assess the IR35 status of your off-payroll workers fairly and compliantly with the Qdos Status Review platform. We assess workers based on two decades’ of experience handling enquiries and completing assessments, and insure the risks involved whilst ensuring your obligations are met under the off-payroll working rules.

RESPONSIBILITIES AND OBLIGATIONS OF HIRING ORGANISATIONS

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR
  • Organisations engaging contractors will need to take ‘reasonable care’ in determining a contractor’s IR35 status. HMRC have published draft guidance on this – click to view on the gov.uk website
  • Having taken reasonable care, clients must issue a ‘status determination statement‘ to both the contractor and the next party in the supply chain (who will be responsible to pass this on in the chain until it reaches the fee-payer). In most cases, this will be the recruitment agency.
    The statement must include both the status decision made AND the reasons behind the decision.
    Until such time as the client provides an appropriate statement to the relevant parties, the client will be deemed as the fee-payer and thus liable for any failure to deduct the appropriate taxes.
  • Clients must implement a ‘client-led disagreement process’ to handle any disputes in status decisions. Clients must respond within 45 days providing the result of this consideration as well as the reasoning.
    Failure to comply with these obligations will once again result in the client being deemed as the fee-payer and therefore liable for any taxes due.

RESPONSIBILITIES AND OBLIGATIONS OF RECRUITMENT AGENCIES

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR
  • Upon receipt of a ‘Status Determination Statement’ from the client, recruitment agencies will be required to either pass the statement along the supply chain to the fee-payer, or where the recruitment agency is the fee-payer, deduct the appropriate tax and NICs from the contractor’s fee before making payment.
  • You will also be responsible for paying the relevant Employer’s NI and Apprenticeship Levy to HMRC.
  • The liability will sit with the fee-payer which will in most cases be the recruitment agency, unless the client fails to adhere to their obligations.
Complete Guide to IR35 Reform

YOUR COMPLETE GUIDE TO IR35 REFORM IN THE PRIVATE SECTOR

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QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

ISSUES TO AVOID

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

BLANKET DETERMINATIONS

A blanket determination is the broad application of an IR35 status to a large group of off-payroll workers without due consideration or assessment.

Whilst role-based assessments are considered compliant in the eyes of HMRC, the blanket application of a determination is not compliant with the rules.

Applying blanket determinations or banning the use of contractors altogether can lead to recruitment difficulties.

Stephen Barclay, Minister of State for the Department of Health and Social Care, stated that “58% of central public bodies have not experienced problems with filling off-payroll worker vacancies and 63% have not experienced an increase in contractor rates payable as a result of the new legislation.”

Although 58% may have not experienced problems, that means 42% are experiencing difficulty in filling vacancies, which is almost half of the central public bodies.

EMPLOYMENT RIGHTS

Whilst operating outside IR35, contractors are not taxed the same as employees, and therefore do not need to seek employment rights such as paid holidays; however, if operating within IR35, they are taxed the same as any other employee would be, but are still not entitled to the same rights.

In late September 2018, Susan Winchester, an inside-IR35 contractor engaged by HMRC themselves, successfully claimed for unpaid holiday pay of more than £4,000 which she claimed she was entitled to in an out-of-court settlement. Ms Winchester was contracted as an agency worker and therefore entitled to employment rights. HMRC decided to settle out of court and allowed Ms Winchester to claim what she was entitled to, setting in motion more noise that these rights must be considered, and to move forward with reform in the private sector without considering these changes would essentially be breaking the Government’s promise to support small business.

This gives a warning to any organisation looking to apply IR35 as a risk-averse strategy to attempt to curb any liability, that a risk will still remain for defending against employment disputes.

CEST’S RELEVANCE

HMRC developed an online IR35 status determination tool – Check Employment Status for Tax (CEST). It is regularly criticised for its lack of relevance to specific roles and industries – a flaw which Recruitment and Employment Confederation (REC) believes extends to the changes overall – and ignores key status tests due to HMRC’s simplistic interpretation of case law.

The tool also puts an over-reliance on the right of substitution test, and contains discrepancies in wordings which are crucial, as it not only changes the situations considered to be acceptable, but also demonstrates the lack of care and understanding in generating the questions.

The solely digital nature of the tool means that context is not provided, and the supporting notes are not always sufficient to omit the misunderstanding of questions. CEST’s digital logic also does not enable it to make a determination on borderline cases, leaving 15% of users without a determination to base their decisions.

CONTRIVED ARRANGEMENTS

In a reaction to IR35 reforms, first in the public and now in the private sector, many organisations have been purporting the use of a clear Statement of Work as a way of circumventing the changes, as HMRC’s guidance states that clients who are receiving ‘outsourced’ services will be exempt.

If services are genuinely outsourced, the supplier of the services (i.e. the consultancy or agency) is considered the client for the purposes of IR35 and therefore carries the responsibility for determining the status of its contingent workers.

However, when organisations are looking to change existing arrangements from a provision of labour to outsourced services. It may be that the supplier in question is not set up to manage projects themselves and simply replacing the existing written agreements with a Statement of Work contract is not enough.

As is the case with IR35 in general, it is imperative that the structure of any written contract is borne out in reality, as the true facts will always take precedence.

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