On 6th April 2021, the new off-payroll working rules, also known as ‘IR35’, will go into effect. IR35 will apply in situations where a worker provides their services through an intermediary (eg a personal service company, a managed serviced company, a partnership or an individual).
In other words, the rules for engaging workers through contracted services are changing. While intermediaries are currently required to determine workers’ employment statuses for tax purposes in the private sector, IR35 will shift this responsibility to the organisation (client) receiving contracted services. Within the public sector, the majority of these rules are already in place. However, from 6th April 2021, public sector clients will hold additional employment status determination responsibilities.
These changes to the off-payroll rules were originally due to come into effect on 6th April 2020. However, this has now been delayed until April 2021 because of the spread of the coronavirus (COVID-19) pandemic. The delay is intended to help businesses and individuals deal with the economic impact of COVID-19. The delay to the introduction of the changes is not a cancellation.
Overall, these new rules will ensure that workers—who would have been considered an employee if they provided their services directly to their clients—pay broadly the same tax and National Insurance contributions as normal employees.
Who the Rules Apply to
The upcoming IR35 changes will apply to:
- Public or private sector clients (including third sector organisations) that receive services from a worker through their intermediary and meet two or more of the following conditions:
- An annual turnover of more than £10.2 million
- A balance sheet total of more than £5.1 million
- More than 50 employees
- Agencies that supply workers to:
- Any public sector client
- Mid- and large-size private sector clients
- Another agency that supplies a worker for public sector clients or mid- and large-size private sector clients
- Workers who provide services through an intermediary
In addition to these circumstances, a simplified test also applies to some clients and considers annual turnover. That is, you must comply with IR35 if you are a client with an annual turnover of more than £10.2 million and are not:
- A company
- A limited liability partnership
- An unregistered company
- An overseas company
There are also rules that apply to connected and associated companies. If the parent of a group is medium or large, their subsidiaries will also have to comply with IR35.
If you are a small-size, private sector client that does not meet the aforementioned criteria, the workers’ intermediary will remain responsible for making employment status determinations.
How and When to Comply
Your specific compliance responsibilities under IR35 depend on your particular circumstance.
From 6th April 2021, all private sector clients that meet the aforementioned criteria must determine the employment status of workers who provide their services through an intermediary. You will need to do so for every contract you establish with an agency or worker.
When determining the employment status of workers, you must take reasonable care. Failure to do so will result in the worker’s tax and National Insurance contributions becoming your responsibility. In addition, you will need to:
- Pass your determination and the reasons for the determination to the worker, and the person or organisation that you contract with.
- Ensure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid.
- Have processes in place to deal with any disagreements that arise from your determination.
If a worker or the agency paying the worker’s intermediary disagrees with the employment status you reached, you will need to take the following steps:
- Consider the disagreement reasons provided to you by the worker or agency paying their intermediary.
- Decide whether to maintain the determination if you feel it was correct and give reasons why, or provide a new determination if you feel it was wrong.
- Keep of a record of your determinations and the reasons for them, as well as records of representations made to you.
You must provide a response within 45 days of receiving notification that the worker or agency disagrees with your employment status determination. During this time, you should continue to apply the rules in line with your original determination.
Failure to respond within 45 days will result in the worker’s tax and National Insurance contributions becoming your responsibility.
If you are a public sector client, you must continue to apply the current off-payroll working rules. From 6th April 2021, you must also comply with the aforementioned employment status determination responsibilities.
If you used the simplified test to determine your size, you must apply these rules from the start of the tax year following the end of the calendar year when you first met the aforementioned criteria.
Keep in mind that if you are also the fee-payer, you will need to deduct and pay tax and National Insurance contributions.
For further government guidance on IR35 compliance for clients, click here.
If you are an agency that supplies a worker who provides their services through an intermediary to a client, the client will be responsible for:
- Making an employment status determination to decide if IR35 applies
- Telling the worker, your agency and any other labour provider they contract with of their determination, with reasons for making the determination
These changes mean that you as an agency could become liable for paying tax and National Insurance contributions if:
- You’re the fee-payer.
- You’re the fee-payer, but fail to pass on the client’s determination to the person or organisation that you contract with.
- You’re the first agency in the labour supply chain.
For further government guidance on IR35 compliance for agencies, click here.
If you are a worker and your client meets the aforementioned criteria, it will be their responsibility to determine your employment status. You should be informed of their decision.
If your clients don’t meet the aforementioned criteria, however, your intermediary will remain responsible for determining your employment status.
For more government information on IR35, click here.
Contact your Konsileo broker today for additional Regulatory Updates and compliance guidance.