Changes to IR35 legislation take effect on 6 April 2021 and have big implications for businesses and contractors, especially those in the built environment and rail space. Sandra Kennedy, Operations Director at Coleman James, explains all you need to know.
IR35 legislation originally came into being in the year 2000 and hit contractors working in the buildings, trades and construction sectors, amongst others. It aims to ensure that HMRC collects tax from those people who are essentially ‘employees’ disguised as limited companies to reap tax benefits.
Since then, the legislation has placed the onus on the individual contractor – usually operating as a Limited Company - to determine their employment status.
Changes to the legislation mean that from April 2021, it will be the responsibility of the end-user client to ensure all their contractors are compliant with IR35 legislation. Those businesses who aren’t compliant with the new rules could face large tax bills and penalties.
Q. How does IR35 affect my company?
Although the rules have been in place since 2000, responsibility for applying them fell on the intermediary (normally the contractor's limited company). From April, responsibility for applying the rules falls with the end-user – the contractor’s client. The end-user must determine if the contractor is really a disguised employee. Liability for getting it wrong falls on the end-user if they do not make the determination or apply the rules.
Q. What impact do you expect this to have on the contractor community?
The impact should not be underestimated. There are an estimated 170,000 contractors engaged by 60,000 end-user clients who may be caught by these new rules.
The off-payroll rules are designed to ensure that a contractor is taxed in the same way as an employee if in reality (applying the appropriate tests) they work like an employee, even if the label applied to them is self-employed. This is because HMRC receives less tax and National Insurance in respect of a self-employed individual than they do for an employee.
Q. How should businesses test whether contractors fall within IR35?
This obligation falls on the end-user, the contractor’s client. They have to determine this and then tell the contractor whether they think the contractor is caught by the rules.
Coleman James uses a robust, insurance-backed product to help our clients make that determination as opposed to the HMRC CEST tool which has come been criticised by some for being inaccurate. The tool initially assesses the role you are recruiting for by asking 12 key questions and using the responses, assesses whether the role is likely to fall inside or outside IR35. If you then offer the role to a Limited Company contractor, they will be asked 42 specific questions, which are then assessed by a specialist (a human being, rather than an algorithm) to give you a definitive answer as to whether that person falls outside IR35 rules.
Because the product is insurance backed, if you are later challenged by HMRC on your determination to use the contractor off-payroll, your legal fees and tax liabilities are paid and you are indemnified by the insurance policy.
This is an especially useful tool for those who haven’t yet considered the implications of IR35 and need to make robust determinations quickly and efficiently while covering their risk.
Q. What are your top tips for businesses and contractors who think they may be affected by this?
End users and contractors should act now. Consider the appropriate test to see if the arrangement is caught – there are numerous factors but the main ones are:
1. Is there an obligation on the end-user to provide the contractor with work?
2. Does the contractor need to do the work personally?
3. Does the end-user control the work? That is: when, where, how etc the work is done?
End users should:
1. Assess which off-payroll workers they have.
2. Analyse the relationship with each – for example, what agreement applies, what and how they are paid, exactly what it is they are doing and how the relationship is managed.
3. Apply the insurance-backed employment status test for each contractor – we can help with this.
4. Implement policies to ensure determinations are passed down the chain, ultimately to the contractor; allow contractors to challenge determinations, and ensure payments are taxed correctly.
Q. Where can you get help?
To talk to Sandra about how Coleman James could help with your IR35 determinations, call her on 0191 300 6360 or 07779 221947 or email firstname.lastname@example.org