LEGAL MATTERS
CHANGES TO THE IR35 RULES EXPLAINED
With the IR35 rules governing the use of contractors and freelancers set to change this year, Claire Halle-Smith, partner at law firm Wright Hassall, explains how businesses should prepare for the developments.
A
cross all sectors, businesses
have
traditionally utilised the services of self-employed contractors,
consultants and freelancers to complement their permanent workforce, especially during busier periods when extra support is needed to complete tasks. If you are a client company that uses contractors regularly or are a freelancer yourself, then you should already be aware of the IR35 rule changes that come into force from 6 April 2021, which will impact the way such services are purchased. However, if you are not already familiar with the rule changes, then it’s crucial that you take the time to understand them in detail, so your business can adjust existing processes to ensure compliance once that date arrives.
How we arrived at this point Before IR35 rules were introduced, freelancers and contractors could provide their services to an organisation via an intermediary, usually a personal service company (PSC), which would allow both parties to enjoy significant advantages.
tax
It wasn’t long before HMRC clamped down on this practice and deemed PSCs to be nothing more than tax avoidance vehicles. In response to this, the off payroll working rules (otherwise known as IR35) were introduced to address the issue of ‘disguised’ employees. In 2017 these rules were amended, making public sector organisations responsible for determining the employment status of those contracted via PSCs and for paying the income tax and NIC for those deemed to have employee, rather than self-employed status. The upcoming rule changes will see this requirement extended to large and medium sized business in
the private sector, 10 DIY WEEK FEBRUARY 2021 meaning
businesses will need to start preparing for the new norm.
What now for employers? All client companies in the private sector will have to comply unless exempted by meeting at least two of the following criteria: • An annual turnover of less than £10.2m • Balance sheet total of less than £5.1m • Fewer than 50 employees Non-exempt organisations must determine the nature of the employment relationship they have with their contractors. This has proved key in a number of recent challenges brought by HMRC and the four main principles on which the relationship will typically be judged are: Control: What control do you have over the contractor (e.g. what, how, when and where they work)? Substitution: Can the contractor substitute a suitably qualified person to act in their place? Financial risk: How much financial risk is borne by the contractor? Mutuality of obligation: Are you obliged to give the contractor work
and are they obliged to accept any work you give them? (The HMRC online test to check employment status, CEST, does not consider Mutuality of Obligation, assuming that it exists engagement).
in every contractor Having assessed the employment
status of their contractors, the organisation must issue them a ‘Status Determination Statement’ (SDS) which confirms whether the contractor is genuinely self- employed or now considered an employee, giving reasons for the determination. HMRC will deem the client company liable
for contracts with tax and NI
contributions until the contractor (and agency or other organisation that
the client
company) is told of the status determination and reasons for it. When the contractor is deemed to have employee status, subject to tax and NI contributions, both parties will need to consider how to deal with the additional tax cost. Companies must ensure their
systems are structured appropriately for IR35 and create a system for addressing any challenges raised by contractors
in terms of the
employment status determination, with legal advice a helpful step in getting things right.
Drawing the right conclusion If your organisation is actively employing the services of contractors, or you are a freelancer providing services to businesses, either directly or via a PSC, then it is in your best interests to brush up on the IR35 rule changes and review the terms of any existing engagements thoroughly. Client companies are liable for
tax and NI contributions until they tell the contractor and the person the contractor contracts with, of its determination and the reason for it. HMRC shows no sign of softening its stance towards those it suspects of tax avoidance and it will be learning from experience to improve its future success rate in court.
Do not be tempted to bypass IR35 by other means and treat any advice to
implement a tax avoidance
scheme with considerable caution, as most do not work and do not have HMRC’s blessing. If you’re unsure about any of
the rule changes and require legal support to ensure compliance, then contact an experienced team of lawyers before April 6 to adjust your processes accordingly.
About the author: Claire Halle- Smith is a Senior Associate in the Commercial Law team at Wright Hassall, where her key area of expertise is data privacy. Her experience spans risk management and strategic planning for businesses, as well as commercial arrangements such as standard terms, supply of goods & services, agency & distribution and service contracts for private and public sectors.
About the firm: Wright Hassall is a top-ranked firm of solicitors based in Warwickshire, providing legal services, including: corporate law; commercial law; litigation and dispute resolution; employment law and property law. The firm also advises on contentious probate, business immigration, debt recovery, employee incentives, information governance, professional negligence and private client matters.
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