Richard Maitland, Partner at MHA McIntyre Hudson gives an update.
Alongside some measures that were anticipated in the Chancellor’s Budget but did not ultimately feature, there was at least one other notable omission. There was no mention of the changes to the ‘IR35’ intermediaries legislation that are due to come into force in the private sector from 6 April 2021. These changes were originally planned to be introduced from 6 April 2020 but were delayed due to Covid. Whilst in current times it is perhaps wise to ‘never say never’, the Chancellor’s silence on the topic of IR35 does seem to indicate there will be no further delay to the changes.
Following the Budget, there is also going to be a new fiscal event on 23 March 2021 – dubbed ‘tax day’ – when the government will publish a number of tax-related consultations and calls for evidence. However, they have stated that none of the announcements will require legislation in the next Finance Bill or have an impact on the government’s finances, which would seem to also discount reference to the IR35 changes.
So, with the IR35 changes expected to take effect this 6 April, it is important that businesses use the remaining time available to progress their preparations. IR35 is shorthand for the employment tax legislation that governs the use of intermediaries. Such intermediaries are typically, but not exclusively, personal service companies, or PSCs. A PSC is a limited company which will commonly have a single director-owner. The individual also then provides services personally to clients via contracts between their PSC and the clients, rather than directly with the individual. The use of PSC intermediaries has long been a focus for HMRC, who consider there is a significant ‘tax gap’ as a result of such arrangements.
The IR35 rules are not new and have in fact been in place for 20 years. The new changes have also been in force for public sector organisations since April 2017. In the private sector, prior to the rules changing from April 2021, it is currently the obligation of the PSC / individual to consider whether the individual’s underlying employment tax status in relation to the end-client (disregarding the PSC) is that of an employee, or if it constitutes genuine self-employment. If their status would be that of an employee, then it is the PSC which is required to operate PAYE when paying the individual. From April 2021, these obligations will shift from PSCs to end-clients, so it will be the end-client that has to carry out an employment tax status assessment of the PSC individual in relation to itself. The end-client will be required to take “reasonable care” in reaching its IR35 decisions.
If a business is a ‘small company’ as defined by the Companies Act 2006 then the new IR35 rules won’t apply to it, subject to the rules regarding some companies which can never be ‘small’. The small company exemption applies where 2 out of the following 3 criteria are met:
- Turnover of no more than £10.2 million
- Balance sheet total of no more than £5.1 million
- 50 employees or fewer
However, where the small company exemption does apply, IR35 will still be relevant as PSCs will continue to have the obligations as under the current rules. If a business is medium or large-sized and engages PSCs then it is likely it will have new IR35 obligations from 6 April 2021, subject to some other limited exemptions.
In addition to carrying out IR35 status assessments, end-clients will have a further new obligation to issue written status determination statements (SDSs) confirming the outcome of those assessments. An SDS will have to be issued to the PSC / individual and other relevant parties in the labour supply chain. If the end-client concludes the engagement is within IR35 then it must operate PAYE where it also pays the PSC. However, there may be a different entity in the supply chain which pays the PSC, which will then be the standalone IR35 ‘fee-payer’. This could be an agency which has a contract with the end-client to supply the services of PSCs. In that event, the end-client must also provide the fee-payer with its SDS, for the fee-payer to then operate PAYE as appropriate.
All businesses affected by the forthcoming IR35 changes should therefore continue to review their existing PSC arrangements and take steps to be compliant in time for 6 April 2021.
To find out more why not re-visit the webinar Richard took part in to explain IR35 in detail. Available on demand here.
*The views expressed are the author’s and not ICAEW’s.