Contractors and IR35 (updated)
We originally published an article about the IR35 reforms in October 2019 - its recommended to read that and get some background. This update was originally written just as the extension of the IR35 legislation (which now includes contractors in the private sector) was scheduled to come into force in April 2020, however that was delayed by the emerging coronavirus (covid-19) pandemic. This article has now been updated again for March 2021, as the law remains largely unchanged from the draft legislation (despite significant discontent from contractors, hirers, and agencies). So what are the changes, who is affected, and what should you do?
Up until April 6th 2021, off-payroll workers such as contractors using their own limited company (a.k.a personal service company, or PSC) supplying into the private sector have been responsible for their own IR35 status, and if they get it wrong then their own limited company is responsible for any unpaid tax. This only ultimately hurts the contractor.
For the tax year commencing April 2021, the responsibility to determine the IR35 status of the contract falls on the end-client (unless the end-client is deemed to be “small” under the Companies Act)- this has a couple of key ramificaitons:
The change in who determines status means that the responsibility for ensuring the correct tax treatment has also shifted, and this leads into the biggest worry for hirers and agencies: "debt transfer". The new legislation gives HMRC the power to collect unpaid PAYE from other parties in the supply chain if they cannot recover it from the contractor or their limited company. This already applies to all contracts in the public sector, and now engagements with medium and large companies in the private sector.
Earlier this year, stories emerged of private sector end-clients who have been assessing their positions with regards to the new IR35 rules, with several notable commercial organisations choosing not to engage with PSCs, in the hope of avoiding assessing them for IR35. Meanwhile, other organisations are applying blanket determinations of "inside IR35" or ‘forcing’ contractors to join the payroll or an umbrella company and therefore be full-time employed. On the face of it, a simple solution - but there is still a problem with this approach.
The blanket determination fails to assess contractors individually, which is also non-compliant, and recent HMRC guidance confirms as such: This approach does not constitute showing ‘reasonable care’ in making a determination, which must be shown when assessing IR35 status. A potential minefield for all involved, as any hirer using a blanket determination or ban could in theory be liable for their contractor's tax!
Whilst we await budget announcements to see if any last minute changes or concessions have been added in light of the ongoing economic disruption caused by covid-19, its worth remembering that FPS is not an employment intermediary, and we offer a PAYE payroll service that is outside of the scope of IR35. Whilst we know that may not be suitable for everyone, we can at least give you the comfort that all taxes and NICs are paid. Call our client services team on 0333 666 1510 to talk to an advisor today.