IR35, also known as the Intermediaries Legislation, is complicated and with major changes set to come into effect in 2021, the time is right to understand IR35’s complexities and how it could impact your business.
What is IR35?
First introduced in 2000, IR35 is designed to reduce tax savings by contractors who HMRC believe to be “disguised employees” – people who, were it not for their limited company (aka a PSC), would be considered an employee of the End Client and therefore paying a higher level of tax and national insurance.
The majority of these transactional relationships are genuine, and there are plenty of limited companies operating in the UK. However, it’s not uncommon for some organisations to pay people in this way to avoid paying employers’ National Insurance contributions or providing employment benefits. A HMRC inspector will determine the correct status by applying an employment test to each case. This will be based on the actual working practices, rather than any contract wording.
What impacts will the reform have?
The biggest change is to End Clients who will become responsible for determining whether a contract with a PSC is inside or outside of IR35. The End Client must confirm the IR35 status of a contract by providing a “Status Determination Statement” (SDS). This is a written determination which provides a conclusion as to whether IR35 applies to the engagement and must provide the reasoning. The SDS must be provided in writing to the PSC worker and, if an Agency is involved in the labour supply chain, a copy must be provided to the Agency responsible for paying the PSC.
The End Client must implement its own “disagreement” process to allow the PSC, and the next party in the chain, to raise any objections to the SDS. The dispute can be lodged at any time before the final payment of the project is made and the response must be dealt with within 45 days. The decision must either confirm the original SDS is upheld, or, if it involves a revised SDS, a new SDS must be provided.
Until the SDS is issued, or if the dispute resolution is not managed within the required time, the End Client will be deemed the Fee Payer, the effects of which are mentioned later. End Clients must prove they have taken “reasonable care” throughout this process, HMRC have confirmed that blanket role-based determinations fall short of reasonable care, otherwise they will remain the Fee Payer.
Who is the Fee Payer and what does it mean?
The Fee Payer is responsible for ensuring the correct tax treatment is applied to the PSC and will be held financially liable if not. The Fee Payer is typically the party closest to the PSC in the contractual chain (i.e. the party physically paying the PSC) but failure of any party to perform their part correctly could expose them to being declared the Fee Payer.
Transfer of debt?
Aside from the SDS and the potential liability as the Fee Payer, the legislation also grants provision to seek recovery of any unpaid tax and National Insurance from any “relevant person”. A relevant person is simply will be the Fee Payer, the first Agency contracting directly with the End Client and the End Client themselves.
“The government believes transferring tax and NICs liabilities where there has been non-compliance in the labour supply chain and where it is not possible to secure the tax liability from the noncompliant entity to the first agency and then to the client, will incentivise all parties in the labour supply chain to take steps to apply the rules as intended. The government hopes this will support the majority of organisations who comply with the rules”
It is vital for End Clients to ensure a robust, compliant and trustworthy supply chain as HMRC will always view them as the final recourse.
The next steps
IR35 Private Sector reforms are planned for implementation on 6th April 2021 and companies should use this time wisely to minimise any disruption to their Contractor workforce. Please review our IR35 FAQs IR35 FAQs for further guidance on some of the terms used plus what this may mean for your business.