Understanding the Changes to IR35 Off-Payroll Rules applicable from April 2021
Are you working as a contractor or intermediary functioning through a Personal Service Company in the UK? Do you have workers who cater to the service requirements of different clientele through your entity? If yes, brace for the regulatory changes HMRC has in store for you with respect to the off-payroll working rules. The revisions in the off-payroll regulations are slated for implementation in the coming month of 2021. These amendments are related to the compliances as per IR35.
Introduction on IR35
IR35, aka the off-payroll working rules, is legislation in effect to tackle the tax avoidance undertaken by workers deploying services to third party customers through an intermediate party. These workers are employees who showcase themselves as self-employed contractors. The introduction of these regulations dates back to the start of the 21st century. This law was passed to ensure that contractors offering services through any intermediary or personal service company are largely liable to the equivalent amount of income tax, and National Insurance Contribution is payable by regular employees. The peculiar name is attributable to the original budget press release titled Inland Revenue budget press release number 35.
Meaning of Intermediary or Personal Service Company
As per the guidelines of the HMRC, an intermediary is, in most situations, the worker’s own service company, and the entity can be a proprietorship, a partnership firm, or a corporate venture. IR35 impacts entities, including personal service companies and recruitment agencies in the UK.
Applicability of the rules stated under IR35
The entity or organization that avails of the services of the contractor is the client or hirer. According to IR35, the client is responsible for assessing if the off-payroll regulations apply to the contractor.
The following parties may come under the purview of IR35 rules:
- A worker who is deploying services via his intermediary
- Any firm or agency that is providing services through their intermediary
- A client who hires the services of the worker via the intermediary
The off-payroll rules apply when a given worker offers his services through his intermediary to a client but would have been classified as the client’s employee if there was a direct employment contract. It is necessary to understand that the applicability of off-payroll rules is on a contract-to-contract basis. Some contacts may attract off-payroll regulations, and some shall not get the same.
The relevant amendment in IR35 rules from April 2021:
As per the HMRC declaration, the off-payroll rules’ amendments will come into effect from April 6, 2021. However, due to the prevailing COVID-19 situation, the implementation is delayed until April 2021. The postponement does not mean that these rules shall not be implemented in the coming months.
Our team at Initor Global shall help you in attaining more clarity regarding the applicable changes. Let us help you in navigating through the same.
- End-Client has the onus to determine whether his worker engagement attracts the criteria as per IR35 in certain cases
The end-client shall be obligated to determine the status of a contract between him and the worker that is entered through a personal service company. The worker shall receive an employment status determination from the client and the grounds for the given determination status. The worker can dispute the status decision if needed.
The off-payroll rules shall differ if the end-client does not give the employment determination from his end to the worker. Laws shall also vary when the worker provides services to small-scale clients in the private sector. If the end-client is a small-scale business entity, then the intermediary shall remain obligated to determine the applicability of IR35.
- Guidelines to follow if the worker does not get an employment determination status
It is important to note that if the client is eligible for a small business exemption to IR35, the worker might not get a status determination. A worker must ask for details related to the client’s size within 45 days during the process of entering into a contract.
- Conditions for Small Business Exemption from revised rules under IR35
HMRC has specified that the medium and large-scale organisations in the private sector and all public sector organisations shall fall under the scope of the revised rules. Small-scale end-clients covered under the definition of “Small Business” are exempt from the amended rules. Clients can claim the exemption from the changed rules if they fall under two or more of the following eligibility conditions:
- The client’s yearly turnover is up to £2 million
- The total of the final balance sheet is less than or equal to £1 million
- There shall be no more than 50 employees working in the client’s entity
Keeping in mind the possibility of using subsidiaries by medium and large-scale organisations to engage services through personal service companies, there are specific regulations enacted. Thus, the parent company’s aggregated turnover or balance sheet total may be considered if required.
No public sector organisations can avail of the small business exemption to avoid the revised IR35 rules.
Obligations of the Deemed Employer as per Revised Rules under IR35
If the off-payroll rules apply to the worker, clients shall be accountable for deducting tax and NIC from the payment made to workers and deposit the same with the government. Thus, once tax and NIC are deducted from the workers’ income, they will not have to pay tax on the same again. Therefore, there shall be no double taxation.
The end-client shall also provide a statement of determination to the worker and agency involved for payment to the Personal Service Company.
- Resolution of dispute related to employment status determination
If the worker opposes the client’s determination status, he needs to comply with the following steps:
- Provide details of the employment status determination under disagreement
- Give valid reasons for the disagreement
- Retain necessary corroborative evidence such as copies concerning the disagreement
One must note that a worker can disagree with the client’s employment status before his last due payment is received. Once a client gets intimation regarding a conflict from the worker, he must revert with his response in the time frame of 45 days from the receipt of the disagreement notice. During the tenure of the dispute, the payment shall be made to the worker as per the original employment status from the client. In case of a change in determination status, the end-client will deliver a new employment status to the worker with confirmation regarding the date from which the status will be valid.
Other Possible Changes:
It is also proposed that the new off-payroll rules when implemented, will lead to the withdrawal of the administration allowance given to personal service companies. The 5% allowance shall be removed from such entities, excluding those service companies dealing with small-scale clients.
Be prepared for the changes in store!
If you are a client or worker who falls under the criteria for the revised off-payroll rules as per IR35, you should keep in mind the additional compliances. The HMRC has the power to evaluate assignments undertaken in the past six years to determine the applicability of the IR35 rules. Hence, due compliance is a must.
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