Whilst most tech businesses have been busy managing the impact of the pandemic over recent months, the date on which the proposed changes to the off-payroll working rules (known as “IR35”) come into force has been edging nearer and nearer. As far as we know at the current time, those changes will come into force on 6 April 2021 (having been delayed for a year due to COVID-19).
The proposals are complex and will have a significant impact on large and medium-sized organisations that engage contractors via intermediaries. This means that many tech businesses will be required to determine the employment status of any independent contractors in order to appropriately shift the tax burden.
It may be that your preparations for the changes were underway earlier this year and now need to be revisited and finalised. Alternatively, it may be that you now wish to engage higher numbers of contractors in light of changing business needs caused by the pandemic and in order to take advantage of the greater flexibility they afford.
What is IR35?
The IR35 rules were introduced in 2000. In very broad terms, they are intended to ensure that where an individual (a contractor) provides services through an intermediary (such as a personal services company) to an end-user client, if the contractor is in fact working like an employee, he/she will pay broadly the same tax as if he/she were an employee. In essence, the IR35 rules, therefore, prevent personal service companies being used to get around the payment of employment taxes.
Under the current IR35 rules, it is the individual who must determine whether the IR35 rules apply and it is the personal services company that must pay any tax due.
In light of an increasing concern that the IR35 rules were not working, the government has proposed changes to how the rules will operate and will roll out the new IR35 regime to large and medium private sector companies in April 2021 (in line with similar changes introduced in the public sector back in April 2017).
What is changing?
The proposed changes mean that the end-user client will now be responsible for determining whether the IR35 rules apply and in some cases for paying any tax and NICs on the sums due to the personal service company.
In addition, there will also be new obligations on end-user clients to assess contractors, make a Status Determination (“SD”) as to each contractor’s tax status, communicate the SD to relevant parties in a supply chain (including agencies) and put in place a dispute resolution process.
These new obligations are not straightforward and are likely to require clear risk assessments and use of the government’s CEST tool (available here) to help determine individual tax status.
It is likely that contractors will demand higher fees in order to recoup the tax that is deducted from their fee. Alternatively, individuals may argue that they are in fact employees (or workers) and that they are entitled to employment rights and certain payments (for example, holiday pay and pension entitlements).
What action should be taken?
There are some important steps that your business can take in order to prepare for the changes:
- Audit your contractor arrangements – contracts with both intermediaries and agencies will need to reflect the IR35 reform
- Consider how your business will prepare for the changes
- Consider what processes and controls you need to have in place
- Negotiate with your contractors at an early stage
- Seek legal advice to help minimise any risks
The key message is not to delay. If you think your business may be affected by these changes, take action to address the issues now.
Our team of IR35 experts can assist and advise you in relation to auditing your contractor arrangements, minimising risk, putting in place the relevant documentation and helping your business prepare for the changes.
What are the penalties?
HMRC has confirmed that, during the first year of the new rules, it will use a “light-touch approach”. This means that penalties will not be issued to businesses as a result of inaccuracies relating to the new rules, but any business that deliberately fails to comply could still be charged.