New IR35 rules: time to act

Important information about the new tax rules for people operating through a Personal Service Company, and businesses that use them.

In April 2021 new tax rules are being introduced which will affect individuals who operate under their own limited company, as well as medium-sized and large private sector businesses that engage their services. These businesses will face greater responsibility in determining the individual’s employment status under IR35 rules. Stephen Allender, Senior Tax Manager from Shorts Chartered Accountants, has given us a useful overview of who the rules will apply to, what they mean and what actions should be taken now in order to be compliant next year.

From April 2021 HMRC is due to change the IR35 rules for individuals that contract through a Personal Service Company (PSC). A PSC is a limited company that provides the services of one contractor, who is usually the company’s only shareholder and sole director. The rule changes were originally due to come into force in April 2020, but this was delayed due to the Coronavirus pandemic.

These changes are likely to result in increased tax for contractors, and an administrative burden for the companies that engage them, so forward planning is highly advised.

What is IR35?

To counteract what HMRC perceived to be a loophole, IR35 was introduced in 2000. This is an anti-avoidance measure aimed at individuals operating through intermediaries but who are, in reality, ‘disguised employees’ of their client.

IR35 has the aim of ensuring that a worker who provides their services through an intermediary, but who would be an employee if they were providing their services directly to the client, pay broadly the same tax and national insurance as employees.

Self employed individuals are not caught by the IR35 rules. However, the business (regardless of company size) that is engaging the individual is still responsible for checking the employment status of the self employed worker to consider whether or not they should be taxed via the PAYE system.

What is an intermediary?

The most common type of intermediary that IR35 may apply to is a PSC, which is effectively the individual’s own limited company. However, it can also apply to a partnership or LLP.

What are the current rules?

Currently, if a private company engages a contract worker via their own PSC, there are no requirements for the engaging company to determine the employment status of the worker. Payments to the PSC are made gross, and the PSC is responsible for determining the tax and national insurance payable on receipts. Under these rules, the PSC is required to account for tax and national insurance if the individual’s role within the client would be regarded as employment if their services were provided directly rather than via the PSC.

What is changing?

From April 2021, every medium and large UK private sector business hiring individuals through their own PSCs will be responsible for determining their IR35 status.

‘Small’ businesses will not be affected by these new rules. A business will be regarded as ‘small’ if it has two or more of the following:

  • Turnover of £10.2m or less
  • £5.1m or less on its balance sheet
  • 50 employees or fewer

Public sector bodies have been subject to the new rules since 2017.

Action required

It is important that private sector businesses act now to be fully prepared for the changes in April 2021. Affected businesses will be required to:

  • Determine the employment status of a worker
  • Pass the determination and the reasons for the determination to the agency or worker
  • Ensure they keep detailed records of all employment status determinations
  • Have processes in place to deal with any disputes that arise from the determinations
  • Deduct and pay tax and national insurance from fees paid to PSCs from April 2021.

Workers deemed to be within the IR35 rules will, from April 2021, see their fees subject to tax and national insurance deducted at source, rather than being paid gross. It is expected that businesses will err on the side of caution in the majority of instances and treat workers as caught by the new rules. The worker can appeal against an employment status determination if they disagree with the decision, but only for the business to review and justify their original decision.

Shorts Chartered Accountants have a dedicated tax planning team ready to support businesses and workers prepare for the new rules. For businesses, we can provide assistance with determining workers’ employment status, liaising with workers as necessary and supporting the business with the appeals process. We can also provide tax advice to individuals on the impact of these new rules and assist in minimising the financial and commercial impacts these changes will have.

For further information, please contact Senior Tax Manager Stephen Allender on 0114 2671617 or email stephen.allender@shorts.uk.com.

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