From 6 April 2021, IR35 Off Payroll Working (OPW) rules for the Private sector have been introduced. Large and medium size end user/client businesses will become responsible for determining the employment status of workers who provide their services via intermediaries such as the worker’s Personal Service Company (‘PSC’) or agencies.
The IR35 legislation has been in place since 2000 and was introduced to tackle the misuse of PSC for tax avoidance purposes. The stated aim of IR35 is to create a level playing field between employees and contractors to ensure that individuals who work like employees pay broadly the same Income Tax and National Insurance Contributions (NICs) as employees regardless of the structure.
New IR35 OPW rules were introduced to the Public Sector back in 2017, whilst the changes in the Private Sector were due to be implemented last year. This was postponed until April 6th 2021 in a bid to protect the economy in light of the COVID-19 pandemic.
Why have new IR35 OPW rules being introduced?
Pre-6 April 2021, the contractor’s PSC was responsible for determining whether the IR35 rules apply or not, but as a result of the above changes, this responsibility has now shifted to the end user/client organisation, that is, the entity in receipt of the worker’s services. This change to the rules comes amid HMRC’s concerns of growing levels of non-compliance and loss of revenue.
This means if the rules do apply, workers and the businesses that hire off payroll workers will have additional income tax and NIC as well as Apprenticeship Levy costs, if applicable.
What has changed?
Under the IR35 OPW, the end user/client organisation is now responsible for assessing the contractor’s employment status for tax/NIC purposes and if the employment status determination shows that the contract is within the IR35 then the deemed employer (i.e., the entity making the deemed direct payment to the worker) will be responsible for the deduction and paying of the income tax and NICs deductions to HMRC.
There is also a requirement for the end user who makes the IR35 decision to issue both the worker and the intermediary with a Status Determination Statement (SDS) advising the worker of the decision. There is no formal HMRC document available, but it has to set out if the engagement is within the IR35 OPW rules or not, the reasons for the decision and the end user/client has to evidence that they have taken reasonable care when reaching that decision. The PAYE liability rests with the end user/client, unless/until SDS has been given to both the worker and the intermediary.
This legislation does not move the employment of the worker to the end user, just the responsibility for making the IR35 decision, and, if the end user does not meet their obligations in this respect the PAYE tax/NIC liability sits with them. The IR35 OPW workers remain employees of their PSC. They do not become employees of the end user/client.
As a result, large and medium end user/client businesses using contractors via intermediaries will need to carefully consider their options and implement a strategy for complying with the new rules.
It is expected around 170,000 contractors may have to pay more tax and estimated that these changes will bring £638b in revenue over next 5 years.
Who do the new rules apply to?
The changes are targeted at workers who provide their services via intermediaries, for example via PSC’s, Agencies, Umbrella Companies or Managed Service Companies.
Sole traders and small non-public sector organisations are not affected by the changes. However, with regards to the sole traders, the entity engaging sole trader workers have always had to assess their potential employment status, this has not changed.
If the end user is a small business, the end user does not have to operate IR35 OPW, and the responsibility for IR35 remains with the PSC/Agency as was the case prior to April 2021. Businesses are classed as ‘small’ for the purpose of the legislation if they can meet 2 or more of the following conditions:
- An annual turnover of not more than £10.2 million;
- A balance sheet total of not more than £5.1 million;
- 50 employees or less
Why compliance is so important
The new rules represent a significant change for many businesses, and getting it wrong could prove very costly.
HMRC have confirmed they will support businesses who are evidently trying to comply with the rules, but deliberate or repeat instances of non-compliance could lead to penalties and interest being levied in addition to the recovery of income tax and NIC liabilities. It is, therefore, crucial that you determine your responsibility in regards to the new rules and put processes in place to abide by them.
Determining your responsibility
The new rules apply to all payments for services made on or after 6 April 2021. Given recent levels of non-compliance, the loss of revenue as reported by HMRC, and the increased funding for HMRC to recruit additional manpower to target non-compliance which was announced in the recent budget, this is likely an area that will be targeted heavily in the future.
It is important to remember that under the new rules, the IR35 employment status determination of the worker engaged via an intermediary always falls to the responsibility of the end user, or end client – not the worker, PSC or agency.