So, the IR35 reforms are finally here!
Blink and you would have missed it, however, somewhat overshadowed by Easter and rows about vaccine passports, the Treasury’s cavalry in the crackdown on disguised employment just about crawled over the line on Tuesday this week. Are you excited? No, admittedly, that’s over egging it, but if you are self-employed or work with contractors then its worth familiarising yourself with the changes to off-payroll working which are now in force.
IR35 is the pet name for legislation which potentially applies to engagements where an individual provides their services through an intermediary, such as a limited company.
Where it does apply, the individual is treated as employed for tax purposes by the business engaging them, or ‘end client’, meaning tax and National Insurance contributions are deducted from the payments to the intermediary.
Whether IR35 applies is determined by a combination of legal tests developed over the last 50 or so years. The new twist is that whereas previously the responsibility for determining whether the rules apply lay with the intermediary, it has now shifted to the end client, which could find itself on the hook for unpaid taxes, even fines, if it fails to take reasonable care in carrying out a status determination and notifying the intermediary and individual contractor.
To ease the administrational burden which the changes inevitably bring, small businesses are exempt – where end clients have two from (i) 50 or fewer employees, (ii) annual turnover of not more than £10.2m, and/or (iii) balance sheet assets of £5.1m or less, the responsibility stays with the intermediary (although the obligation to determine whether IR35 applies remains leaving profligate intermediaries at risk).
Additionally, there will be a light-touch approach to enforcement for the first 12 months of the new system, while further tweaks proposed in the Finance Bill 2021 will correct an unintended widening of the definition of an intermediary.
However, with the likely introduction a targeted anti-avoidance rule and consequences for businesses or individuals providing fraudulent information to parties within their supply chain, now is not the time to play chicken with HMRC.
The government has provided support by way of its Check Employment Status for Tax (CEST) tool, which will assist businesses with status determinations.
Unfortunately, the underlying algorithm is not infallible and seeing how determinations rely on value judgments as much as binary answers, even armed with accurate information businesses are encouraged to seek professional advice in order to take reasonable care (https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10014).
Procedurally, the transfer of information needs to take place via Status Determination Statements (SDSs) and an individual caught by IR35 must be given an opportunity to challenge their determination with a requirement for appeals to be heard within 45 days.
Who ends up making the ‘deemed direct payment’ will depend on the length of the supply chain and in longer chains will not necessarily be the end client, adding to the complexity.
Then there is the question of employment rights as someone treated as employed for tax purposes will not automatically be an employee in the eyes of an employment tribunal (and where they are, for how long have they been employed is another issue).
Left unchecked, disguised employment – deliberate payroll avoidance – will allegedly cost the exchequer £2bn in unpaid taxes by the end of 2022.
Little wonder then that the reforms have not been postponed for another year although the manner in which they have been ushered in probably speaks for their popularity.
Hardly positive news for business right now, however, perhaps the government’s view is that you can’t make an omelette without breaking a few eggs.
For advice on IR35 or assistance with carrying out or challenging status determinations, please contact Paul Clark at Jacksons Law Firm E: firstname.lastname@example.org T: 0191 2069626.
We are also running a free IR35 webinar with Torgersens Accountants on Zoom on 20 April 2021, 9.30-10.30am.
You can register for the event on the following link: https://bit.ly/3s0j02z