How will IR35 change in 2021?
Read time: 5 mins
To understand how the new IR35 legislation may affect tech businesses, we spoke to Jacqui Roberts, Associate Director of Global Employer Services, for her insight into how companies should prepare.
What does IR35 look like now?
In essence, when a contractor works for another business through his or her own company, NIC might be avoided as a company can’t be an employee. However, when the contract is providing services that would be treated as employment but for the existence of the intermediary, the existing ‘IR35’ tax legislation requires the contractor to deduct PAYE and National Insurance Contributions (‘NIC’) from payments made to his or her intermediary company (referred to as their ‘personal service company’.
Why is it changing?
“The reasoning behind this was that the government and HMRC believe that not all PSCs have operated IR35 correctly over the past 20 years that the current legislation has been in existence,” explains Roberts. “Only around 10% of PSC owners were assessing their status as employed and operating PAYE/NIC on fees received, according to HMRC.”
What is changing?
Originally the rules were changing from April 2020 but it has been announced that the changes to the rules will be postponed to April 2021. The government have made it clear this is a deferral in response to COVID-19 to help businesses and individuals, it is not a cancellation.
Now from 6 April 2021, the obligation for the individual in the PSC to make the assessment and deduct any PAYE/NIC will transfer from the PSC to the engaging entity or end client. It will mean that tech businesses that are engaging individuals through PSCs will need to assess their IR35 status.
It will also require companies to understand their supply chain as the rules require assessment of any individuals that are providing their services indirectly; for example, via a temporary employment agency and, potentially, some consultancy companies that provide individuals to tech companies.
These rules replicate existing legislation, in force since April 2017, for workers providing services to the public sector. While the public sector legislation has largely been mapped across to the private sector, there are some changes from April 2021 that both the public and private sector engagers must apply.
A review of the original draft legislation took place in February 2020 concentrating on the smooth implementation of the new rules; and the new draft legislation issued is the same.
"One of the outcomes of the review was the new rules will only apply to services and not payments being provided after 6 April 2021."
Essentially this is a transition easement, to ensure that those that provide services in March 2021, but are not paid until April 2021, will not need fall in the new rules.
What does this mean in terms of new responsibilities?
“Engagers are mandated to undertake the IR35 assessment before any payment is made to a PSC for services provided post 6 April 2021. “The engager is required to provide the outcome of the assessment in the form of a Status Determination Statement, or SDS,” says Roberts. “This needs to be passed on to the worker, the PSC and the next entity in the chain if this is not a PSC, i.e. an agency”.
“The SDS must state whether the individual is deemed to be an employee for tax purposes only. If the engager does not take ‘reasonable care’ when completing the assessment, any potential PAYE and NIC obligations of other parties can remain the engager’s obligation,” Roberts elaborates.
There will also be additional costs where the worker is a deemed employee. If the engaged is also the payer of the PSC, as well as the deductions, it will have to pay employers’ National Insurance at 13.8%, and consider the apprenticeship levy (0.5% of earnings).
Another serious change is that the engager will need to have an appeals process in place. This will allow the individual (under their personal services company) or their intermediary agency, to appeal the SDS assessment.
"The engager must enact any appropriate changes to their decisions on the SDS and provisions of revised SDS assessments within 45 days of the appeal being lodged. "
What should businesses do to prepare?
Companies can now use the postponement period to prepare fully. Any work done to date is by no means wasted and now there is no longer a need for a rushed response. There is time to pause, reconsider and refine to get it right first time. There will also be time to make evaluations and deal with appeals processes. “If a business has a large population of contractors, it may take some time to find the individuals at the end of the supply chain and make those assessments,” says Roberts. “It would be advisable to have a focus group internally to fully understand the new rules and how they will impact your business.”
Seeking further insight on IR35 or need assistance with preparing for the changes in April 2021? Email us at [email protected].
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