A guide to IR35 Off-Payroll tax changes

However, from 6 April 2021, the delayed changes to the off-payroll working rules in the private sector shift the responsibility for PAYE and National Insurance to the end medium and large-sized clients. 

 

The client will need to complete a status determination statement to determine if the off-payroll rules apply. If IR35 applies to a contract, HMRC will consider the engagement as a “disguised employment” which will require the client or agency who pays the contractor to deduct income tax and employee’s National Insurance from the payment. 

 

The history of the legislation involves many court cases assessing three main areas: 

 

 

If the client can be considered to apply sufficient control over the contractor such as determining the location of where the work is completed, decides the tasks to be completed, requests that work is completed in specific hours, and can imply how the work is completed, then these would indicate that the contractor is an employee. 

 

 

The contractor company can provide a suitably qualified substitute to carry out the work on their behalf without the consent of the client. 

 

In the case Red, White and Green Ltd v HMRC [2020], it has been mentioned that if a genuine right of substitution exists, this negates an obligation to perform work personally and is inconsistent with employee status. If a contractual right, as for example a right to substitute, exists, it does not matter that it is not used. 

 

If these clauses genuinely reflect what might realistically be expected to occur, the fact that the rights conferred have not in fact been exercised will not render the right meaningless. 

 

 

Mutual obligations are necessary for there to be a contract at all. If there is a contract, it is necessary then to determine what type of contract it is. If it is a contract of employment, there is an on-going duty to provide work and an ongoing duty to accept work. The employer is obliged to pay the employee and give them work, and the employee is obliged to complete the work. 

 

In a contract for services with a client, the contractor agrees to provide a specific service and can refuse to undertake work. 

 

Therefore, it is complex to conclude the type of contract on the basis of mutuality of obligation and this test has been excluded from the HMRC’s online tool. 

 

It needs to be noted that also any agreement where the contractor is required to work exclusively for the client for a long period is likely to result in a mutuality of obligation pointing to an employee-employer relationship. 

 

The changes in the rules will mean that the client as the fee payer and therefore with greater ability to influence the client-contractor relationship will put the burden on medium and large organisation which as per HMRC’s expectation is that they will adopt a conservative approach placing many contractors inside IR35. 

 

 

The impact with contractors placed inside IR35 can be compared to public sector where the rules are in place since 2017. An example to compare is where NHS and local councils employ many IT contractors and without the time and resources to review and assess each contractor’s engagement, blanket approaches are introduced placing all contractors as employees for tax purposes. 

 

As a result, a large number of government IT projects are being reported with significant delays as contractors left public organisations when the rules were introduced rather than be deemed as employees inside IR35. 

 

 

From 6 April 2021, IR35 is rolled out to the Private Sector. The rules will only apply to medium or large companies and specifically excludes small companies – those that meet two of the following three criteria: 

 

£10.2m or less turnover; 

 

£5.1m or less on the balance sheet; and/or 

 

50 employees or less. 

 

Contractors working with small companies clients will continue to be responsible to assess if their personal service company should operate the IR35 rules. 

 

 

HMRC’s guidance requires that the client must take reasonable care when making a determination about the employment status of a contractor. Failure to do so will result in the worker’s Income Tax and National Insurance contributions becoming the client’s responsibility. 

 

However, HMRC has confirmed that a client deciding to move all its contractors to full employment or a client deciding not to engage contractors through intermediaries is not a blanket determination which can leave the reasonable care requirement redundant where some large businesses have put a blanket ban on engaging limited company contractors. 

 

 

If you do not agree with your client’s decision about your employment status for tax, you can raise your concerns through your client’s status disagreement process, explaining why you disagree. From 6 April 2021, all clients are required to introduce a process to ensure that they consider your views if you disagree with their decision. Your client will have 45 days from the date they receive your disagreement to respond to you 

 

In addition, if you are uncertain about a client organisation’s size, you can formally request confirmation from them. The client has a legal obligation to respond. 

 

A contractor working inside IR35 will be classed as an employee only for tax purposes meaning that where the off-payroll rules apply, this does not mean that you will be entitled to statutory payments or employment rights from the client you provide your services to or the agency that pays you. 

 

 

The Off-payroll (IR35) working rules were introduced with the aim to treat people fairly, but the impact of the changes brings the question if the financial losses for contractors and the increased administrative burden on businesses along with the lack of clarity might instead result in ‘draconian’ tax changes that can add to the disruption and financial damage caused by the pandemic.