Getting ready for the off-payroll tax reforms – changes to IR35

IR35 is a tax law initiative introduced in April 2000 to address issues of ‘deemed employment’ where a business engages workers on a self-employed basis, (usually through intermediaries) rather than on an employment contract, essentially ‘disguising’ the worker as an employee.

There are benefits to the company in using this method, alleviating the requirement to pay national insurance contributions (“NICs”) or provide the usual rights of employment.  Consequently, legislation was designed to balance the protection of workers’ rights, whilst delivering potential lost taxes to the Exchequer. The reality has been that the contractor is liable for double taxation of employer and employee NICs, significantly reducing their take home pay whilst taking care of the hirer’s tax bill.

The tests to determine employment status are enshrined in Ready Mixed Concrete Ltd v Minister of Pensions (1968) reviewing inter alia (a) the degree of control the client holds over the worker; (b) whether the worker could be easily substituted and (c) whether there is a mutuality of obligation between the parties. It will then be decided on the balance of probabilities the employment status of the worker and whether IR35 applies.

These tests are complex, having been debated over decades in the courts, so it is fanciful to expect anyone other than an expert in employment law to interpret the tests accurately. Therefore, a considerable challenge is presented to both contractors and tax inspectors when evidencing self-employment or the existence of a notional contract of employment respectively.

The ‘off-payroll tax rules’ were introduced in April 2017 and will apply to the private sector from April 2020, squarely shifting the onus of responsibility from the contractor to the company, client or agency in determining employment status. The rules will apply to medium and large sized companies meeting two conditions of either (i) a turnover in excess of £10.2 million; (ii) a balance sheet over £5.1 million or (iii) more than 50 employees. These conditions may fluctuate and should be reviewed periodically to continually assess whether the rules apply. It should be noted small companies as prescribed under the Companies Act 2006 are exempt from applying the rules.

The client is now responsible for determining the employment status of a worker and this analysis should be carried out with ‘reasonable care’ for every contract agreed with an agency or worker.  Although contractors are now not required to assess their own status, it is advisable that they are actively involved in the process. This may promote fairness in the assessment, help reduce the administrative burden on the client and minimise disputes.

The final determination (as recorded on a Status Determination Statement) should then be passed to all the relevant parties contracted with, before or on the start date, with clearly stated reasons for the decisions made. Detailed records should be maintained along with fees paid in anticipation of review or inspection. There must also be a process formulated to deal with any disputes that may arise from any determination made.

A client that is the fee payer should deduct and pay tax and NICs to HMRC; liability for tax and NICs can only pass to contracted persons on proper communication of the determination.

Understanding of IR35 and the new off-payroll tax rules are essential requirements for a business to meet compliance requirements, mitigate risk and remain competitive. Software tools are also available to help monitor compliance within an organisation.

You may require help in assessing whether the new rules apply to your company, what tests to consider when assessing your contractual relationships or need support in preventing disputes borne from a particular determination. Whatever your angle, preparation should be well under way if your medium to large business is captured by the off-payroll tax rules.