There was no last-minute reprieve in Westminster’s latest Budget speech, which means IR35 rules will finally extend to the private sector next month.
This reform was due to kick in last April, something we covered at the time, only for something called COVID-19 to emerge and force a 12-month delay.
From 6 April 2021, some private-sector contractors will start paying tax differently. It will also affect the organisations that hire them.
The move targets self-employed contractors who operate in a similar way to employees, but operate through their own companies to save on tax.
How will the IR35 reforms work?
Medium and large-sized organisations in the private sector will become responsible for judging whether contractors are inside or outside of IR35.
They need to determine a contractor’s employment status and should give reasons behind their decision. A contractor can challenge this decision.
Should the IR35 rules apply, the organisation needs to deduct any income tax or National Insurance contributions (NICs) at source before paying a contractor – and pay employer’s NICs.
HMRC estimates this will affect around 60,000 private-sector organisations that engage contractors, plus 20,000 recruitment agencies. More than 170,000 private-sector contractors might be affected.
Smaller firms – those with fewer than 50 staff, a balance sheet of less than £5.1 million, or annual turnover of no more than £10.2m – are exempt.
Determining employment status
HMRC has created something called a check employment status for tax (CEST) tool to help you determine if a contract should be classed as employed or self-employed for tax purposes.
There must be a contract in place before you use the CEST tool, however, as it assumes a contract is already in place.
That assumption has drawn criticism as this mutuality of obligation only exists with employment contracts. In contrast, the self-employed can choose which projects they want to work on.
Before you use the CEST test, medium and large-sized organisations, third parties or intermediaries, should have details of:
- the contract
- the worker’s responsibilities
- who decides what work needs doing
- who decides when, where and how the work will be done
- how the worker will be paid.
HMRC will not penalise “accidental breaches” of the IR35 rules in the private sector for the first 12 months, until 6 April 2022. However, if there is evidence of deliberate non-compliance, you can expect a penalty.
In February 2020, HMRC said it would not open new investigations into personal service companies for tax years prior to 6 April 2020, unless there is reason to suspect fraud or criminal behaviour.
While that announcement pre-dates COVID-19, there is no reason to suggest this is no longer the case.
If you would like to discuss the IR35 rules extending the private sector, the rules around substitutions or claiming an expenses allowance if a contract is within the rules, contact us by emailing firstname.lastname@example.org or calling 0141 221 2257.