What is IR35?
Much has been talked about the changes to the tax regime for temporary (or ‘off payroll’) workers that have come into force this April. Similarly, many column inches have been written about the likely impact on business, how to manage and mitigate these changes etc. With many clients now unsure and worried about its impact we are going back to basics and asking, “Fundamentally, what is IR35?”
IR35 has been on the statute book for a number of years, and was initially put in place for the public sector back in 2000 to enable HMRC to identify and mitigate unpaid tax and NI from those described as ‘disguised employees’. IR35 aims to ensure that all workers are taxed fairly. This means that if an individual is defined as a ‘disguised employee’, effectively doing the same job under the same conditions as an employee, the rules ensure parity in the amount of tax and NI paid to HMRC.
What is new?
The main difference coming into effect in April 2021 is around the responsibility of who makes the determination as to whether an engagement is inside or remains outside IR35. Up until now, the onus has been on the individual contractors themselves to determine their IR35 status. The new guidelines state that now the end client will be responsible for making the determination. This will be done by utilising the HMRC CEST tool, a questionnaire which then documents and outputs the status of the engagement, and therefore which rules apply. These must be communicated to the agency and contractor prior to the work commencing. The liability for ensuring the correct amount of tax and NI are collected rests with the fee payer. Depending upon the supply chain involved, this could be the end-client, or any consultancy or agency involved in supplying the contract resource.
Will it affect your business?
This mainly depends on the size of your business (there are certain criteria which define this including turnover, balance sheet, and number of employees). It will mostly affect medium and larger organisations that have traditionally engaged Interims or Contractors via their limited or Personal Service Company (PSC).
How does a company determine the IR35 status?
The Check Employment Status for Tax (CEST) tool is provided by HMRC and has been updated to be more accurate and user friendly. It asks questions about the role, and then works out the inside or outside determination. Whilst the questions are wide ranging, there are four main areas that will be relevant which are Supervision, Substitution, Part and Parcel, and Mutuality of Obligation.
https://www.gov.uk/guidance/check-employment-status-for-tax
Next Steps?
If your organisation is a regular user of off-payroll resource, then be proactive and start looking at ways you can integrate the new working methods into your operating model. You may need to reimagine some roles and look at how they are structured. If you have existing off payroll Interims in the business, you should have already run the CEST tool and have acted on the determination.
Whist there will be inevitable change and uncertainty around the new guidelines, organisations that are proactive and embrace the changes will soon adapt to the new systems and paperwork. The change could also be viewed as an opportunity to reassess your flexible working model, and look at the best way to augment incumbent teams. Interims provide an invaluable resource to deliver change, gap-fill and generally up-skill an organisations FTE community – are you getting the best out of this resource?
Further information can be found at https://www.gov.uk/guidance/understanding-off-payroll-working-ir35
If any of this has resonated with you, and you would like a further information or want to arrange a confidential conversation, please call me on 0207 484 0067 or email me via mike.davies@normanbroadbent.com.