With the final countdown to the reform’s implementation now on, we look at what to expect come ‘IR35 day’.
Andrew Laurie, tax manager at Hall Morrice gives advice ahead of the April 6 2021 deadlines.
Inland Revenue release issue 35 – or IR35 – was originally introduced by HMRC back in 2000 as an update to tax legislation to ensure that self-employed consultants, contractors and freelancers working through their own limited company or personal service company (PSC) paid the right tax. It mainly targeted those considered ‘disguised employees’ - individuals working on a contract through their PSC providing services similar to an employee of the business.
By working through their own PSC, contractors are not taxed as an employee and pay less National Insurance Contributions. IR35 aims to combat tax avoidance by ensuring that those who are working as contractors or freelancers are a business and not working as if their client has directly employed them.
From 6 April 2021, the responsibility for determining a contractor’s IR35 status will transfer from the contractor to their client. Previously, the onus was on the contractor to determine whether they had IR35 status when it came to their self-assessment, taxation and NI contributions.
This latest reform to the IR35 policy applies to all medium to large-sized businesses within the private sector, having already been applied back in 2017 to public sector organisations contracting freelance workers.
The 2021 IR35 reform will affect all businesses with at least two of the following - an annual turnover of more than £10.2 million, more than 50 employees and a balance sheet of more than £5.1m.
For such private sector businesses, the IR35 update means that they will need to decide whether a freelance contractor falls inside the off-payroll rules – in short, whether that individual would be deemed an employee if their PSC was not in place.
At the heart of the IR35 reforms are freelance workers who provide a service to a client via a Limited Company, and where they are a director and a fee-earner. However, the responsibility is now on the contracting company to make the IR35 assessment concerning their contractors.
With the North Sea gas and oil industries heavily reliant on contract workers, the sector will be one of the biggest to be impacted by the IR35 reform and the shift to the end-user business when it comes to the assessment responsibility.
With the implementation of the new IR35 reform, the end-user now needs to determine whether the individual falls inside or outside of the IR35 rules.
From 6 April, large and medium-sized companies will be required to assess whether the IR35 rules apply to all the consultants, contractors and freelancers on their books who are being paid via their limited company.
The assessment should consider, amongst other factors, three principal areas: who has control over how work is completed, any mutual obligations for ongoing work and whether the contractor has to complete the work personally or whether there can be a substitution.
Whether the contractor is engaged through an intermediary also needs to be considered as while it is the agency’s responsibility to make any necessary tax deductions, the end-user business will still need to complete the IR35 assessment and determine the contractor’s status.
For businesses required to complete IR35 assessments on their contractors from the 2021/22 tax year, there can be implications if they fail to comply or incorrectly complete their assessments. These include fines for delays and backdated PAYE and NI demands to cover unpaid tax in relation to an IR35 contractor.
However, HMRC has announced that there will be no penalties for inaccuracies during the first 12 months, as long as there is no evidence of ‘deliberate non-compliance’ when completing IR35 assessments.
Information received by HMRC under the new IR35 rules will also not be used to open new compliance enquiries prior to the 2021/22 tax year unless there is reason to suspect criminal behaviour or fraud.
Experts are urging calm when it comes to applying IR35 and to seek professional guidance on the assessment process so that your business – and contractors – are fully prepared.
Effective communication with contractors – who will be understandably concerned about the assessment outcome and potential reduction in their net income – will also support a smooth transition to the new IR35 process and protect your essential working relationship with your freelance teams.
“Being aware of the potential impact of the IR35 reform – on your business, your audit process, your contractors and your supply chain – is essential, as is ensuring you take reasonable care in completing each IR35 assessment.
“It is also important to seek the right professional advice on the IR35 fundamentals, reporting requirements and potential impacts so your business fully complies with HRMC’s expectations.”