IR35 Reforms
From 6 April 2021, medium and large businesses (the client) will be responsible for determining the status of any contractors (the workers) that provide services to them through an intermediary (limited company or partnership).
If the client determines that the status of a worker is that of an employee, the worker is regarded to be within IR35 and payments must be subject to PAYE & NIC.
However, if the status of the worker is regarded to be outside IR35, they can be paid gross.
It doesn't matter if the client pays the workers through an agency, it remains the client's responsibility to determine the status of their workers.
To determine the status of workers, the client will need to consider a number of factors, including:
The level of control over the worker - Can the worker work independently or do they need supervision?
Mutuality of obligation - Is the client obliged to find work for the worker and is the worker obliged to accept?
Financial risk - Is the worker financially responsible for correcting their own mistakes?
Right of substitution - Does the worker have the right to hire substitutes to perform duties on their behalf?
Number of clients - Does the worker have a number of clients or just one?
Provision of equipment - Does the worker or the client provide the equipment?
Part and parcel of the client’s business - Does the worker receive any benefits from the client? Do they have business cards in the client's name? etc.
HMRC will not just rely on the contract between the client and worker to determine the status, they will look at the actual working practice, eg they will not accept a 'right of substitution' is in place because it is mentioned in a contract, they will want to know if the right of substitution has actually been implemented.
Once the client has determined the status of the worker, they will need to provide them with a Status Determination Statement (SDS) which explains how they came to their decision.
The client must have a Status Disagreement Process (SDP) for workers to appeal if they disagree with the decision.
To assist clients with the determination, HMRC has a Check Employment Status for Tax (CEST) tool:
www.gov.uk/guidance/check-employment-status-for-tax
If the client completes the CEST tool honestly they can confidently rely on the results.
If HMRC looks into the relationship between a client and worker and determines the status of a worker to be within IR35 but the client has been paying the worker gross, HMRC has the right to ask the client to pay the PAYE/ NIC that they should have deducted from the worker and charge penalties/ interest.
HMRC has announced a 'soft landing' for the new IR35 rules and has confirmed that penalties will not be applied for errors in the first 12 months but clients could still be held liable for underpaid PAYE/ NIC.
For more information on the April 2021 changes to off-payroll working for intermediaries and contractors, visit:
www.gov.uk/guidance/april-2020-changes-to-off-payroll-working-for-intermediaries
I will be adding further blogs in the coming weeks as I receive further detailed guidance from HMRC.
If you have any questions relating to IR35 reforms or any other HMRC-related matters, please get in touch.