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IR35 extension to the private sector delayed but what will it mean for those affected?

IR35 extension to the private sector delayed but what will it mean for those affected?

The latest Finance Bill extended the “Off payroll working” rules (originally IR35) as they apply to public sector bodies to medium and large companies in the private sector. The start date has been put back to 6 April 2021, which is to be welcomed, but will those affected be ready for the change?

Who is affected?

Only small companies are exempt. The definition of a small company is one with no more than:
• £10.2 million of turnover (£12.2 million gross)
• £5.1 million Balance Sheet assets (£6.1 million gross)
• 50 employees
It is thought that 60,000 engagers will be affected.

What does it mean?

The IR35 rules were introduced 20 years ago. They were intended to address the situation where an individual provided services to an engager through a personal service company (PSC) but, except for the presence the PSC, would have be regarded as an employee of the engager. The PSC allowed the individual to achieve certain tax efficiencies by timing when they were paid, taking dividends, etc and the engager was not required to pay employer NIC. The IR35 rules apply to individuals that would otherwise be considered employees of the engager and require any intermediary body, such as a PSC, to operate PAYE on the income it receives from the engager for the services delivered by the individual.

A private sector company within the new rules will need to determine whether an individual who is engaged via one or more intermediaries should be regarded as an employee under the IR35 rules. The engaging company will be required to prepare a Status Determination Statement and provide a copy to both the worker and the person or organisation with which the contract for services is held. It must state the conclusion and the reasons for coming to it. A determination of employment status will have consequences:

• The fee payer will be treated as an employer for income tax and NIC
• Any fees paid will be treated as employment income
• The fee payer must operate PAYE and pay employer NIC
• PAYE must be reported and paid through HMRC’s Real Time Information system

What approach to take?

The extension of off payroll working rules to the private sector follows a roll out of the same rules for public sector bodies from 6 April 2017. A House of Lords select committee has reviewed the off payroll working rules and heard evidence from representatives of public sector bodies that have been affected. The committee’s report is uncompromising in setting out the shortcomings of IR35 and the generally negative public sector experience.

Line of least resistance?

The committee heard evidence that many public sector agencies had simply issued blanket status determinations and treated all service providers as employees in the belief that they were less likely to be challenged by HMRC. Undoubtedly, their logic is sound; HMRC will be very happy to receive IR35 PAYE even if this is the result of an incorrect or over-prudent decision, but that decision comes at a cost:
• The fee payer will need to pay 13.8% Employer NIC in addition to any fee paid to a supplier as well as deducting PAYE and employer NIC
• The fee payer must take on additional administration costs and risk around the required PAYE reporting
• Some engagers giving evidence to the committee said that they lost key contractors because of the decision to treat them as employees, which jeopardised major projects
• Other contractors demanded higher fees to compensate for the amount now lost in payroll taxes.

Embrace the challenge and apply the rules as intended?

But will you get it right? The House of Lords select committee heard evidence that pointed to the failings of HMRC to help fee payers to get it right. For many years, HMRC has made available on-line software called Check Employment Status for Tax tool (CEST). Unfortunately, the committee heard that it may only be able to provide an indicated status for a little over 80% of the engagements tested. That aside, the committee heard evidence that the software was fundamentally flawed owing to the absence of key tests applied to employment status. It was widely perceived to produce disproportionately more employment status decisions; the answer that best suits HMRC. Evidence was given that CEST results were often overturned at Tribunal and examples were given where the results were skewed because HMRC did not agree to key factors being inputted.

Clearly, anyone looking to operate the off payroll working rules rigorously will need to have an organised process for reviewing and determining the status of those service suppliers that could be within the IR35 rules and arm themselves with the appropriate tax advice. A strategic approach should reduce the uncertainty and burden of the new rules. It may be possible to apply suitable filters to arrive at clear groupings of those who are definitely outside or inside the rules and then focus effort to consider the more difficult cases. These too may be grouped and sampled to reduce the level of intervention before applying resources carefully to make the difficult decisions as reliable as possible.

The important message is to make sure you have adequate records to support the decisions you make. In our next article we will look at what it means to be on the receiving end of a challenge from HMRC and to go through a difficult enquiry into the employment status of service suppliers engaged by a company.