It now appears unlikely the government will further delay the introduction of the changes to the IR35/off-payroll working (OPW) legislation. Although we have a Budget on the horizon, the economic impacts of the COVID-19 pandemic are sure to lead to more, rather than less, tax raising measures. Indeed, HMRC will be eager to get this project up and running as soon as possible.
Although they have stated that they will police the system with a light touch, they still aim to collect any tax, National Insurance (NIC) and interest for any non-compliance matters.
One only needs to look at the amount of recent IR35 tribunal cases to appreciate that HMRC are determined to target “off-payroll” labour, particularly those as freelancers, consultants etc. that appear to perform similar roles to employees incurring tax or NIC via PAYE.
When will the change take effect?
The changes were originally scheduled to come into effect on 6 April 2020 but will now “go live” on 6 April 2021.
Who will this impact?
Primarily medium and large companies (using the Companies Act definition) that hire workers operating via their own Personal Service Companies (PSCs). In addition, other parties in the labour supply chain, such as agencies and payroll departments will also have to consider the changes being introduced.
What does this mean?
From this April, all medium and large companies that hire freelancers/contractors etc. using their own PSC as an intermediary, must undertake a status determination before a payment is made to the PSC. Effectively, a decision must be made to conclude whether the worker would be truly self-employed (“outside IR35”) or employed (“inside IR35”) if the PSC were ignored. A written copy of the decision, called a Status Determination Statement (SDS) must be given to the worker and to the party in the supply chain that ultimately makes the payment to the PSC. In addition, a formal process must also be introduced to resolve any disputes that may arise with respect to the status decision.
What SDS method can be used?
Although HMRC’s own assessment tool (CEST) is a useful starting point, any method that produces a fair appraisal of the actual role undertaken can be used. It is also important to undertake your own review of the actual role undertaken by the worker, along with the terms and conditions of any contract. It is also important to consider the outcome of related tax tribunal decisions, such as the recent one involving the TV and radio presenter Kaye Adams that went against HMRC.
What are the consequences failing to implement the rules properly?
If caught by the rules, a hirer is legally obliged to deduct and pay over to HMRC any PAYE/NIC (including employers’ contributions at 13.8%) on payments made to a PSC before an SDS is issued.
If after a status review the role carried out by a worker is deemed to be one of employment in nature (“inside IR35”), the worker must be put onto the RTI payroll system with tax or NIC deducted from the payment made to the PSC.
How can we help?
The new rules are complex with many traps for the unwary. It’s therefore essential that you review and identify any such contractors being hired via a PSC to ensure a thorough process is in place to correctly assess their status for IR35.
If you require any help with understanding the rules or implementing the changes to the rules, please get in touch with Graham Caddock (firstname.lastname@example.org).