HMRC confirms delay of IR35 changes
Published: 13th April 2020
By Steve Talbot, Global Employment Services Partner at BDO
HMRC has confirmed that the proposed IR35 changes will not be implemented in April 2020, instead, the new rules will come into action from April 2021. Currently, where an individual is engaged via a PSC and the contract, invoice and payment is all with the PSC, specific tax legislation applies; known as IR35. This has provided employers (‘end users’) with comfort that they may not have to deduct PAYE/NIC on payments to the PSCs. The onus is on the worker to determine whether the IR35 rules apply to the engagement and to operate IR35 if they are deemed to be an employee for tax purposes. HMRC consider that the workers are not operating this correctly so are making a change.
For services provided after April 2021, new rules mean that the end user will now be responsible for determining whether the IR35 rules apply. The IR35 rules will apply where an end user determines a worker should be classed as an employee for tax purposes and there is a PSC in the chain. The new legislation does not change the employment status principles, it simply moves the onus for determining employment status to the end user benefiting from the services supplied by the worker engaged through a PSC somewhere in the supply chain.
What are the changes from April 2021?
Under the new rules, businesses must consider whether there are any PSCs in their supply chains. If there are PSCs in the supply chain and the business is considered the end client; that business will be responsible for considering the employment status of each worker working through a PSC. However, there is an exemption for engagers that are ‘small’. A company will be small if it satisfies two or more of the following:
- annual turnover not exceeding £10.2m,
- balance sheet total not more than £5.1m,
- no more than 50 employees.
When considering whether a company can be considered small, the whole group needs to be considered and not just the individual engaging entity.
The end client will also be responsible for issuing a Status Determination Statement (“SDS”) to the worker and the next entity in the supply chain in respect of each engagement.
Ultimately, where the IR35 rules apply, the entity engaging with the PSC (the “fee payer”) should operate PAYE/NIC including employers’ NIC and the apprenticeship levy on the payments made to the PSC.
The end user will need to be able to evidence that they have taken reasonable care when determining the employment status of their workers. They also need to have a process to deal with appeals from the worker. Once an SDS is issued, the worker can appeal against the determination. If they appeal, the end user has 45 days to respond with evidence as to why they believe the worker is caught by the new rules. The end user has not met their IR35 obligations unless they can evidence they have taken reasonable care.
Key considerations – what do I need to do?
Businesses should be preparing for the new rules ahead of 6 April 2021. Set out below are some of the key considerations and steps that should be taken:
1. Understand your supply chains
End users should understand their supply chains and the interaction between the various off payroll regimes. The various types of regulations should be considered
in the following order of priority.
- Employment status regulations
- Agency regulations
- Managed Service Company regulations
- IR35 regulations
- Construction Industry Scheme regulations.
2. Understand the facts of the engagement
This should consider the who, why, where, what and when of the engagement. This should include matters such as financial risk, mutuality of obligation, control and other key employment status tests.
3. Categorise workers
Workers should be grouped into manageable populations where appropriate, which may allow a sample check approach for status determinations. However, this may not be possible as employment status should be considered for each individual.
4. Assessment and testing
A review of the facts and an assessment of the appropriate off payroll regulations should be undertaken with SDSs produced, where appropriate.
5. Implement policies
HMRC strongly recommends that companies adopt a strategic policy for off payroll engagements. There is a requirement to be able to evidence to HMRC that reasonable care has been taken.
Procedures should be introduced and appropriate personnel should understand their responsibilities and actions. Procedures should include using appropriate tools to assess employment status, documenting findings to provide evidence to HMRC, undertaking sample reviews of engagements and monitoring contracts on a regular basis.
To agencies, PSCs and workers.
End users need to ensure that for any appeals they are in a position to respond to the worker with backup to support their decision where employment status is challenged.
There is a lot for businesses to consider in respect of the changes from April. There are also many misconceptions around employment status with some personnel misunderstanding what is really important and how the need to look at the full picture to form a view is paramount to achieving good tax practices. Some of the common misconceptions are mentioned below.
Common misconception 1
The worker can work for other companies and therefore the worker must be self-employed and the IR35 rules do not apply.
The worker only provides services one day a week and therefore the worker must be self-employed.
Each engagement must be assessed individually, regardless of the fact that a worker provides services to other companies or only works one day a week.
It is possible for a worker to have more than one employment or to be part time.
Common misconception 2
The worker is engaged through an agency and therefore I do not have any responsibilities and do not need to consider the IR35 rules.
The IR35 rules need to be considered by the end user if there is a PSC anywhere in the supply chain.
Common misconception 3
The worker is providing construction services and deductions are made under CIS regulations therefore I do not need to consider the new IR35 rules.
The IR35 rules should be considered prior to the CIS regulations.
Common misconception 4
The contract states that the worker is self employed therefore the IR35 rules do not apply.
HMRC would base any status determination on what happens in practice rather than what is stipulated in the contract.
HMRC’s approach to establish the fact pattern for an engagement often includes interviewing workers in order to understand the arrangements in place.
Common misconception 5
The worker is engaged on a project basis and therefore must be self-employed.
There are several indicators of employment status and all facts of the arrangement need to be considered when making a status determination.
Common misconception 6
‘I can provide a substitute per my contract therefore I must be self-employed’
The mere right to provide a substitute is immaterial, the main factor is whether a substitute has ever been provided in practice.
Common misconception 7
The worker has completed a determination and it states that they are self-employed.
As the end user, the onus is on you to determine employment status by undertaking the appropriate testing.
To help with not falling foul of some of the misconceptions, and in order to challenge
the status quo on employment status, why not start with the following questions:
- Why is the worker not an employee?
- Should they be a part time employee/fixed term employee?
- Do they do the same as my employed staff? If so what is the difference between them?
Employment status is not an easy subject, the onus is now on the end user to determine the employment status of their workers. The risk of getting it wrong is high given the complexities of employment status and blanket approaches should be avoided.
When you compare this to the cost of getting it wrong; this leaves businesses with a real financial headache. Determine a worker to be self-employed and face the potential costs of PAYE/NIC if you get it wrong. Determine employed, and face the risk of the worker appealing and having to undertake additional work to evidence your decisions or potentially lose the worker.
There are no easy decisions here. However, if you have not yet tackled this issue, there is still time to do so.
Global Employer Services Partner, BDO
This article is featured in Yorkshire Finance Leaders Magazine Issue 15