The long-anticipated changes to off-payroll working rules will finally come into effect on April 6.
The IR35 changes were originally set to be brought in last year, but the start date was delayed for 12 months because of the coronavirus pandemic.
The new rules are intended to tighten non-compliance with off-payroll working regulations and they shift responsibility for determining the tax status of contractors from the workers to the end users.
The rules allow HMRC to tax sole traders as employees if it deems their working arrangements are akin to regular staff.
The taxman says they are designed to ensure individuals working like employees, but through their own limited company (often known as a ‘personal service company’ or ‘PSC’), or other intermediary, pay broadly the same Income Tax and National Insurance contributions (NICs) as individuals who are directly employed.
HMRC has said it will focus on ensuring compliance with the new rules, rather than investigating past arrangements.
So what do the new rules mean?
If you contract for a medium or large-sized non-public sector organisation
From April 6 your client will be responsible for deciding your employment status for tax for the services you provide them. They should provide you with a ‘Status Determination Statement’ if the rules apply, setting out and explaining their decision.
If your client determines that your contract is inside the off-payroll working rules and so you are a deemed employee for tax purposes then your client, or the agency who pays your fees, will also be responsible for deducting Income Tax and NICs before they pay you.
You will still need to submit a tax return, but relief is available on the tax already paid.
For the tax year 2020 to 2021, your limited company or other intermediary will remain responsible for operating the off-payroll working rules and accounting for and paying the relevant Income Tax and NICs.
If you contract for a public authority
Your client is already responsible for determining your employment status for tax and they will continue to be responsible. Now they will need to provide you with a ‘Status Determination Statement’ setting out their decision about whether the off-payroll working rules apply.
If you contract for a small non-public sector organisation
Your limited company or other intermediary will remain responsible for determining whether your contract is inside the off-payroll working rules, and accounting for and paying the relevant Income Tax and NICs.
If you are not sure if your client is small, you have the right to request information from them about the size of their organisation.
Clients cannot apply a blanket status assessment across all contractors
Your client must take reasonable care when making a decision about whether the off-payroll working rules apply.
Applying a decision to a group of off-payroll workers with the same role, working practices and contractual terms may be permissible in some circumstances, but it is not right to rule all engagements to be inside or outside of the rules irrespective of the contractual terms and actual working arrangements.
It is natural that businesses will consider whether limited companies or other intermediaries are the best way to engage you, and other contractors, if you are working like employees. This is a business decision for organisations to make, and organisations will be free to decide how they engage their workers.
Some organisations might decide to move you onto an employment contract or engage you through an agency rather than directly, while other organisations may choose to continue engaging you through your own limited company where this suits their business model.
Continuing to work through a limited company
These changes do not affect whether you can work through your own limited company, generally known as a ‘personal service company’, or ‘PSC’. This will still be possible after April 6, however the way the Income Tax and NICs are calculated and paid may change for some contractors, or some clients may change the way they wish to engage you and other contractors.
Contractors are not all self-employed
Your employment status, whether you are employed or self-employed, is not a matter of choice. It depends upon the terms and conditions of a particular engagement and your actual working practices. The fact that you supply your services through your own limited company is not necessarily relevant to whether you are employed or self-employed.
The off-payroll working rules will only apply to individuals who are working like employees under the current employment status tests, and do not apply to the self-employed.
For example, if you work predominantly for the same client, at their premises and following their policies and procedures, you cannot send a substitute to work on your behalf and would require permission to seek additional work elsewhere then you are more likely to resemble an employee.
• To discuss any issues relating to IR35 and the changes, please contact me on 01772 430000