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IR35 Private Sector Reform from April 2021

IR35

In 2017, the Government reformed the off payroll rules in the Public Sector, making end clients responsible for determining the IR35 status of any contractors they engage. Since then, the contracting industry has waited for IR35 private sector reform and in April 2021, such reform will come into place.

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This means an end client will be responsible for determining the employment status of any contracts they enter into with contractors’ limited companies (PSCs).

What is IR35?

IR35 is legislation designed to stop so called “disguised employees” receiving a tax advantage by operating through an intermediary, like your limited company. IR35 status determinations look at the relationship between you and your end client to decide if it resembles employment or a genuine business to business relationship. Those who are “caught by” or “inside” IR35 must pay broadly the same tax and National Insurance Contributions (NICs) as an employee would.

The scope of the 2021 IR35 private sector reforms

Before April 2021, if your client is a private-sector organisation, you are responsible for determining your own IR35 status. From April 2021, the changes will apply equally to public and private-sector organisations, and most of your clients will become responsible for determining your IR35 status in your place.

In addition, if the client determines that you are inside IR35, the “fee payer”, which is the party who makes payments to your limited company, has to deduct PAYE tax and NICs from any payments they make. Employers NI will also be due on such payments.

Exemption for small private companies

The new rules will not apply where the end client is a small private company as defined by the Companies Act:

  • Annual Turnover of less than £10.2 million
  • Balance sheet total less than £5.1 million
  • Number of employees less than 50

Where your end client satisfies two of the above requirements, then the new rules will not apply and you will retain responsibility for determining your IR35 status as director and owner of your company.

The requirement for reasonable care

The legislation requires that the end client exercise reasonable care in determining IR35 status. This means, for example, that each contractor’s individual circumstances and working practices must be taken into account, so “blanket” or “role-based” determinations don’t meet this requirement on their own.

Dealing with non-compliance with the IR35 rules

Where the correct tax and NICs are not paid to HMRC, liability will lie with whichever party has not complied correctly with the rules. For example, if the end client has not completed an IR35 determination or communicated it to the supply chain, they will be liable. Conversely, if the “fee payer” (usually a recruitment agency) has received an inside IR35 determination but has failed to act on it, liability would lie with them.

Responsibility for employment tax deductions

If the client determines that you’re outside IR35, the fee payer (however pays your limited company) can pay your invoices gross as normal and you are free to implement your own tax planning strategy. However, if the client finds that you’re inside, the fee payer must deduct PAYE tax and NICs from any payments made to you. They will also need to pay employer’s NICs to HMRC. 

Check Employment Status for Tax (CEST)

The Government’s own IR35 assessment tool, Check Employment Status for Tax (CEST), has been widely criticised for ignoring case law, giving inaccurate results and showing a bias towards inside IR35 determinations. However, some end clients may still want to use it, because of its status as the Government’s “official” tool.

We strongly recommend that CEST is only used in conjunction with other methods, as it can’t be relied upon in its current form. There are other assessment tools available, for example Orange Genie Compliance offer access to a more reliable, insurance backed status tool.

If you have questions of if we can help in any way please call our expert team on 01296 468 483 or email info@orangegenie.com.

 

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