IR35 legislation is expected to impact around 170,000 individuals who work through their own personal service company (PSC), who according to the Government would be deemed employed if engaged directly. However, it isn’t just those individuals who will be impacted, with the legislation also reaching to the following entities:
Medium and large-sized companies and the public sector that engage with individuals through PSCs; and,
Recruitment agencies and other intermediaries supplying staff through PSCs.
Interestingly the government believes there will be on-going savings for the PSCs due to the fact that they won’t need to determine their own status going forward. However, the risk and costs lie with the companies engaging the individuals, with the government expecting the costs to business to be in the region of £14million.
Exemption for small companies
There is an exemption for small companies, therefore, the rules only apply to those who meet two or more of the following conditions:
Annual turnover of more than £10.2 million
A balance sheet total of more than £5.1 million
More than 50 employees
What you need to do
Determine the employment status of a worker and do this for every contract you agree with either an agency or a worker.
Pass your determination, along with your reasons for that to the worker and to the person or organisation you contract with.
You will need to make sure you keep accurate and detailed records of the employment status determinations along with the reasons and any fees paid.
You will also need to make sure you’ve got processes in place to deal with any disagreements that arise from your status determination.
Those deemed small clients in the private sector will not have to decide the employment status of workers but will now need to advise the supply chain they are small and fall outside of the IR35 legislation.
If you are also the fee-payer and these rules apply to you, you will need to make sure you deduct and pay tax and National Insurance contributions to HMRC. In addition, if you are subject to the apprenticeship levy you will need to take this deemed income into account.
To understand if you are a fee-payer and to understand the corresponding payroll and tax obligations, please read the following article: IR35 Payroll Obligations
How do I make a status determination?
There are a number of factors that ought to be considered when making a status determination.
HMRC do have a status determination tool, CEST. (Please note, this tool isn’t perfect and can often conclude that status cannot be determined)
You may decide you would prefer someone else to make or assist with the determination. Here at Armstrong Watson the tax team are more than willing to help you and the relevant contact details are included at the bottom of this page.
Once the determination is made, you are required to share it with all the supply chain and the worker. It is also highly important to retain records, especially of how you reached the status determination. If using CEST and the information entered is accurate then HMRC will stand by the decision made by the tool.
What if the worker disagrees with your status determination?
A worker has the right to appeal against your determination. If your worker disagrees, they’ll need to do this in writing.
You have 45 days from the date of receiving the worker’s appeal to respond. During that time, you should continue to apply the rules in line with their original determination.
If your employment status determination has not changed, you will have to tell the worker and explain your rationale. If the employment status determination has changed, you will have to tell the worker (and the fee-payer if applicable).
Penalties for non-compliance
It is worth bearing in mind that understanding your supply chain will be part of any Corporate Criminal Offence (CCO) process. This requires companies to have reasonable procedures in place to demonstrate a defence against the CCO legislation.
As part of HMRC’s recent announcements, probably in advance of any recommendations made by the House of Lords, HMRC confirmed that penalties will not be applied to genuine mistakes in the first 12 months. Deliberate acts will still attract penalties.
Useful links
Visit GOV.UK website for a wealth of useful publications covering all the changes to the off-payroll working rules from April 2021.
Amongst other things, you will find a very useful case study along with top tips and also a decision-making tool for contractors.
