On 6 April 2021, off-payroll (IR35) rules in the private sector will change to mirror those that were made in the public sector in 2017.
IR35 legislation, which is also referred to as the off-payroll working rules, is a set of rules aimed at preventing tax avoidance and ensuring that self-employment is legitimate. It is designed to make sure that anyone who works as an employee, but through their own personal service company, pays broadly the same income tax and National Insurance as those candidates who are employed directly.
The April IR35 changes mean that it is no longer an individual’s responsibility to determine their status when employed via an intermediary for tax purposes. This responsibility will now fall to the ‘end user clients’ and is more commonly known as determining whether your workers are ‘inside IR35’ or ‘outside IR35’.
NB: Some companies who are deemed ‘small’, or who have no UK connection, will be exempt from these changes.
What does IR35 mean for our clients?
The biggest change is that from 6 April 2021, it will become the “end user’s” responsibility (in a lot of cases, that means your responsibility) to determine the employment status of contractors - i.e. appraising whether they should be “inside IR35” or “outside IR35” and deducting any tax and NICs if they are due.
As a business/company, you will need to use the next few months to determine whether the IR35 changes apply to your organisation and then:
- review who is in your supply chain
- review what roles are filled by PSCs
- decide how you will make your status determinations i.e. what tools
- consider what happens to pay and charge rates
- decide how you will report payments and what records to keep
- create a review process to monitor contractor roles on an ongoing basis
- ensure SDS determinations are upheld by your supply chain
How MCG supports our clients with IR35
All of our Clients and Contractors have access to -
- Designated IR35 Account Manager: A dedicated IR35 expert to help answer any of your queries.
- Free SDS Tool Access: Access to IR35 assessment tools free of charge and support with making your contractor determinations.
- Free Webinars & Training: Business support from IR35 experts in the form of webinars, blogs and training.
- 360 Dedicated Support: 360 support in assessing the best options for your business.
IR35 Glossary and Key Terms
What does IR35 actually stand for?
IR35 is an acronym for Inland (I) Revenue (R) and 35 denotes the press release issue number 35 after it featured in Gordon Brown’s 1999 Pre-Budget speech over 20 years ago.
What does IR35 mean?
IR35 legislation, which is also referred to as the off-payroll working rules, is a set of rules aimed at preventing tax avoidance and ensuring that self-employment is legitimate.
IR35 forms part of the Income Tax (Earnings and Pensions) Act 2003 ('ITEPA'). It applies to workers of personal service companies (limited company contractors) who provide services to clients via their own limited company but whose working relationship with the client is more alike to permanent employment - sometimes referred to as a "disguised employee".
What does inside IR35 mean?
If determined ‘inside IR35’, an individual is deemed to work in a way that makes them look like an employee of your company and should pay pay broadly the same tax and National Insurance contributions as if they were an employee.
What does outside IR35 mean?
If determined ‘outside IR35’, it is considered that the worker does not work in a way that they look like an employee. They are therefore classed as self-employed and able to manage their own tax efficiences and obligations.
Who is the end user client?
The “end user client”, “end user” or “end client” is the organisation who is or will be receiving the services of a contractor. They may also be known as the engager or hirer. The client are/will be responsible for determining if the off-payroll working rules apply.
Who is the fee payer?
The fee-payer is the party paying the worker, limited company or other intermediary.
Who is the intermediary?
An intermediary is usually a worker’s personal service company (PSC), but could also be a partnership or an individual.
What is a status determination statement (SDS)?
A ‘Status Determination Statement’ (SDS) is a comprehensive statement which declares a contractor’s deemed employment status (following an IR35 assessment) and provides reasons for the conclusion.
IR35 and Level of Control
The level of control exercised by the client over the services which are to be provided, as well as how they are provided, when they are provided, and where they are provided is highly important for determining IR35 status.
IR35 and Mutuality of Obligation
HMRC will view an employer as making sure that their employees have a continuous supply of work, and will also expect the employees to carry out the work when they require. Whereas a self-employed individual will do the work they are being contracted to do and will finish with no expectation of further work.
IR35 and Right of Substitution
Contractors must be able to demonstrate that their end client does not need them to personally deliver the services. They must be able to evidence that any individual with the relevant level of skills, qualifications, and experience would be able to deliver the services successfully.
IR35 and Exclusive Services
The length of an engagement is not in itself decisive as ‘long periods working for one engager may be typical of an employment but are not conclusive’. Contractors outside IR35 should however have the right to take on additional clients concurrently (i.e. at the same time).
What is Right of Dismissal?
Normally a self-employed person couldn’t be dismissed other than if they were in breach of the terms of their contract. HMRC see notice periods as being indicative of employment however reasonable notice periods are considered defendable.
IR35 and Financial Risk
A self-employed individual provides their own equipment, is responsible for investment in management and have the opportunity of profiting from the performance of their task. Overall the take a financial risk in operating and are responsible for how the business is run.
IR35 and Office Holders
An office-holding position is a role created by statute and appointed to a board of directors - however, what may appear to be an office-holder position, may just be a job title (such as ‘Director’) rather than an actual office holding for which IR35 applies.
Note: If a contractor is the Director of their own PSC, this does not constitute as an office-holding position in this scenario - the provision refers to a role held within the end client’s organisation.
IR35 and being ‘Part and Parcel’ of the Organisation
Contractors must not be ‘part and parcel’ of the client’s business as if they were one of their employees. They should not be on any internal lists of employees or have business cards showing their client’s name and, crucially, must not be entitled to any benefits offered to the client’s own staff, i.e. bonuses, pensions, and use of facilities such as a gym.
IR35 and Intention of the Two Parties
If a contractor’s status is still unclear after using the other IR35 tests, the intended relationship of the parties can be used as a tie-breaker decision to determine the outcome of an enquiry. This test looks to differentiate the type of contract undertaken; a self-employed person works under a ‘contract for services’ and an employee under a ‘contract of service’.
