How will IR35 change in 2021?
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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 means the individual 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 government believes 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?
Following a delay due to the COVID-19 pandemic, 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. Tech businesses that are engaging individuals through PSCs will need to assess each individual’s 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.
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, and the next entity in the chain if this is not the PSC, e.g. an agency. And don’t forget, if you engage such contractors on longer term contracts, you may already have contracts that fall within these rules because they run until after 6 April 2021.”
“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 engager is also the payer of the PSC, as well as the deductions, it will have to pay employers’ NIC at 13.8%, and consider the apprenticeship levy (0.5% of earnings).
Engagers must also put an appeals process in place to allow the individual (under their PSC) or their intermediary agency, to appeal against the SDS assessment. After an appeal, the engager must enact any appropriate changes to their decisions on the SDS and provide an updated SDS assessment within 45 days of the appeal being lodged.
"After an appeal, the engager must enact any appropriate changes to their decisions on the SDS and provide an updated SDS assessment within 45 days of the appeal being lodged."
Exemption for small businesses
The engager business (if it is the end user) may be exempt from the new rules if it is considered ‘small’ for Corporation Tax purposes. The definition of small is certainly not straight forward when you are considering scenarios involving groups companies, joint ventures, and overseas entities. Therefore, if you believe your business qualifies as small, we recommend advice is taken and retained to confirm your position and why. If the contractor or next entity down in the labour supply chain asks you, the law requires you to confirm whether or not you are defined as small.
What if the tech business gets it wrong
HMRC has stated that if the end engager does not take reasonable care in the assessment for the SDS, any underlying PAYE/NIC liabilities will remain with the end engager and there could also be penalties and interest.
What should a tech business do to prepare?
The first steps is for the end engager to understand their supply chains and identify all individuals engaged via a PSC. This may be relatively straight forward for a very small business however “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, need assistance with identifying your population of PSCs or with any other process for preparing for the changes in April 2021? Email us at [email protected].