IR35 reforms are having an impact

As we approach IR35 reform’s first year anniversary in April 2022, a national survey of mid-sized businesses has discovered that nearly one in five are still not confident in their firm’s compliance.

That figure comes on top of recent research from The Association of Independent Professionals and the Self-Employed (IPSE).

It reported that “more than a third of contractors in the UK have left self-employment since the changes to IR35, either moving into permanent employment, retiring, working overseas or simply not working”.

The research also found that of those who remain, more than a third again are now working through unregulated umbrella companies and another third are working through engagements deemed ‘inside IR35’.

A report in September this year, less than six months after the roll out, said that HMRC had confirmed it had started writing letters to companies requesting details of their compliance procedures.

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.

They allow HMRC to tax sole traders as employees if it deems their working arrangements are akin to regular staff.

It 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.

Here is a reminder of what the new rules mean:

If you contract for a medium or large-sized non-public sector organisation

From April 6, 2021 your client has been responsible for deciding your employment status for tax for the services you provide them. They should have provided 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, is also responsible for deducting Income Tax and NICs before they pay you.

You 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 was already responsible for determining your employment status for tax and they continued to be responsible. They must 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 remains 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. And they must take reasonable care when making a decision about whether the off-payroll working rules apply.

Continuing to work through a limited company

The changes do not affect whether you can work through your own limited company, generally known as a ‘personal service company’, or ‘PSC’. This is still possible.

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 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, please contact me on 01772 430000