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Today HMRC announced that whilst the delayed IR35 changes will come into effect from 6 April 2021, there will be a ‘soft landing’ as part of their compliance strategy.
Whilst many were hoping for a U-Turn or further deferral here due to the unprecedented times, it appears HMRC are looking to implement the planned changes in the next six weeks, which were originally planned for 6 April 2020.
What is IR35?
IR35, or Intermediaries Legislation, is used to describe the tax legislation designed to combat the tax avoidance by contractors/freelance workers and the firms that hire them, typically via an intermediary such as a limited company (sometimes called a ‘Personal Service Company’), who would be employees and pay tax via PAYE, were it not for the intermediary. These ‘deemed employees’ have to pay Income Tax and National Insurance, as if they were employees, if HMRC deem them to be within the legislation, which would have a significant impact on their incomes. Confusingly IR35 is used to refer to all this legislation, past, present and future.
Whilst the legislation has been in place since April 2000, it is regarded as poorly conceived and badly implemented by HMRC, which causes unnecessary costs and hardships for other genuine businesses. The government therefore tried to refresh the legislation for the Public Sector in 2017 and this was proposed to be extended to medium and large firms in the private sector from April 2020, before it was delayed. This is however now coming into effect from 6 April 2021. Medium and large firms are defined as having two or more of the following:
- turnover of more than £10.2 million;
- balance sheet total or more than £5.1 million; and / or
- 50 or more employees.
These private sector firms will see a shifting of responsibility for determining the tax status of the contractor from the service provider to the client business. If a contractor was considered a “deemed employee” the client business would then be responsible for processing payments through their payroll making all necessary tax and NI deductions rather than the contractor doing this themselves, unless of course they chose to operate through an Umbrella company.
How do you know if IR35 rules apply?
It is recommended that you look at the Check Employment Status for Tax tool (or ‘CEST’). While this tool is not perfect, it provides good guidance as to what HMRC are looking for to determine if a person is an employee or contractor. HMRC are also seeking to make further improvements to it, in advance of the changes on 6 April 2021.
The type of indicators that need to be considered when determining IR35 status are the usual ones in determining if a person is an employee or independent. i.e.,
- Where the contractor has a right to substitute another person for his or her own services, this is seen as a strong indicator that the relationship is contractor and customer rather than employer and employee.
- Where the client has significant control and direction over the worker this will be seen as an employee and employer relationship. Conversely, where the worker has control over how the job or assignment is completed this is seen as a contractor/client relationship.
HMRC also look for what is called mutuality of obligations. That is, is there an obligation to provide and accept work between the parties? This is an area of dispute between HMRC and many practitioners, and can be difficult to determine with confidence.
Compliance Principles
HMRC have spent the last twelve months developing their compliance strategy. Their Principles will underpin the way HMRC support individuals and businesses to comply and how they will intervene, where they suspect non-compliance:
- Support customers who are trying to do the right thing and comply with the rules;
- Help customers meet their responsibilities under the off-payroll working rules;
- Where customers make a mistake, they will help them correct it and check they are corrected;
- Identify and correct non-compliance with the off-payroll working rules;
- Challenge deliberately non-compliant customers and tax avoidance schemes; and
- Have a specialist team specifically to carry out off-payroll working compliance activities.
More information can be found here.
Soft Landing
Today, HMRC confirmed that companies will not have to pay penalties on any inaccuracies within the first 12 months of the new rules coming into effect, unless there is “clear evidence of deliberate non-compliance”.
The aim is to help companies implement the new rules while also recognising the difficulties they may be under as a result of the coronavirus pandemic.
However, “deliberate defaulters” will be named and shamed to encourage them to get their “tax affairs in order”. For this reason, the Government has urged businesses not to cut corners when introducing these new rules.
Need IR35 advice?
If you would like to talk through the overall principals, changes coming into place, have an IR35 review, our specialist team of business advisers is ready to help; contact Black and White Chartered Certified Accountants today, complete the ‘Got a Question’ form on the right hand side, or call us on 0800 140 4644.
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