IR35: Its time to review your contractors again ahead of April 2021
With the arrival of covid-19, the Inside IR35 payroll reforms that were due for the private sector in April 2020 were delayed by a year.
The CEST tool (more below) has been updated but otherwise not a lot has changed in the meantime. The proposed IR35 changes for the private sector, now planned to take effect from April 2021, represent the biggest change to employment tax for decades.
So, the question is, who determines whether a contractor is inside or outside IR35?
The rules are different depending on whether a contractor is working for a client who is in the public or private sector.
Public sector contractors:
The end client (the employing company) is responsible for determining their IR35 status. That means the company would need to use HMRC’s check employment status for tax tool (CEST), or an independent service, to make a decision.
Private sector contractors
If a contractor is working for a client within the private sector, they are presently still individually responsible for determining their IR35 status. This will change from April 2021, for businesses that are medium-to large sized where the organisation will become responsible for determining the IR35 status of individual contractors.
What constitutes a small company?
A company is excluded from this change in rules for now if they meet two of the three following requirements:
Turnover of no more than £10.2 million
Balance sheet total of no more than £5.1 million
No more than 50 employees
So, I need to work out the status – what do I need to do?
Review each contractor using the CEST (Check employment status for tax) tool online – there are other providers but some charge. You can do so using this link: https://bit.ly/3qrQKG3
To check their status you will need to know in advance;
Details of the contract
The worker’s responsibilities
Who decides what work needs doing
Who decides when, where and how the work is done
How the worker will be paid
If the engagement includes any corporate benefits or reimbursement for expenses
And then Provide a Status Determination Statement (SDS), which explains whether IR35 applies to the contract.
It’s important to note that:
You are required to show 'reasonable care' when working out IR35 status – hence the need to look at each case individually.
You should have a written process for when an individual wishes to appeal the decision and ensure that this process will provide an outcome inside 45 days.
The impact of IR35 determination on private companies:
Inside IR35:
Classed as an employee for tax purposes
Income tax and National Insurance contributions are paid on the contract for services/invoiced amounts
You will need to deduct and pay tax & National Insurance contributions to HMRC for all payments made from April 6 2021.
Outside IR35:
Continue to pay as before without deductions.