April 2021 will see responsibility shifting on who decides whether IR35 applies to private sector employers in some circumstances. In the public sector, the client must already decide employment status, whereas, in the private sector, employers decide workers’ status. Until now, the worker has determined the status in the private sector.
It is key that businesses have a concrete understanding of the testing for IR35 status and the possible consequences for making mistakes. Here are 10 things private sector employers need to know:
1 – Confirm You Understand The New Rules
As of April 2021, the decision on whether the conditions for IR35 are met will swing from contractors and their personal service companies (PSCs) to their private sector hirers. This applies where the “end client” is a medium or large-sized company, i.e those satisfying at least two of the three tests:
- Balance sheet over £5.1 million
- Turnover over £10.2 million
- More than 50 employees
LLPs and unincorporated businesses need only consider the second test.
2 – Budget For Larger Costs
Effective budgeting is vital, to avoid experiencing cash-flow problems. New procedures will entail additional costs for businesses.
For example, private sector engagers might need to start paying employers’ National Insurance Contributions (NICs) and the Apprenticeship Levy. Undertaking IR35 reviews will probably incur professional fees or internal administrative costs. Integrating these into financial models can help to reduce the impact on the company’s cash position.
3 – Determine IR35 Status
Determining IR35 status has caused confusion in the public sector, given the complex nature of the process. To help employers, HMRC has attempted to streamline the process by introducing the Check Employment Status for Tax (CEST) tool. It tries to determine whether a worker can be categorised as self-employed or not.
4 – Review Current Contracts
Undertake assessments to determine whether IR35 applies. Essentially whether the contract is a business-to-business arrangement. Do the individual’s working arrangements match what is stated in their contract?
Relationships can change over time. It is common for indicators of employment to creep in as time passes and familiarity grows, such as invitations to staff only events.
Both the working practices and contract must support self-employment, to prevent IR35 from applying.
5 – Deliberate Who To Inform
Employers must communicate their decisions and the reasoning to the business they pay and the worker. They should do this regardless of whether IR35 is found to apply or not.
6 – Implement An Appeals Process
A contractor can appeal an employer’s judgement, who must then respond within 45 days. Businesses should ensure they have a fair and complete appeals process in place and consider the likely impact on their cash position and existing resources.
7 – Review Employment Models
Renegotiating the workers’ contracts could be of interest to both end clients and contractors. Specifically, this could include choosing to make them direct employees and building strong distinguishing factors into the new contractual agreement
8 – Be Cautious Of Transfer Of Liability Rules
From April, HMRC can effectively transfer the debt up the supply chain when a party in the supply chain has failed to apply PAYE. HMRC can initially pass the debt to the staffing company that holds the contract with the end-user if they cannot recover funds from the business paying the PSC.
If the agent cannot pay, the liability can be transferred to the end-user. Engagers should demonstrate that they have taken reasonable care. They can do this by being satisfied that everyone in the supply chain is tax compliant.
9 – Consider Cutting Back The Number Of Agencies In The Supply Chain
Businesses may need to absorb added costs attached to IR35 compliance. One way of reducing the effect is to consider cutting back the number of parties taking a cut. It also reduces the risk of non-compliance by others in the supply chain and protects against the transfer of liability.
10 – Take professional advice and be ready
The new rules will increase costs and administration for businesses, particularly when assessing status, dealing with disputes and liability for additional taxes. If the changes have not already been considered, we strongly recommend getting up to speed now. Private sector employers should seek the right professional advice. They should also conduct a thorough review of their employment practices and ensure they fully understand their implications.
Commonly asked questions
Is it possible for hybrids to exist where sometimes the worker is an employee and sometimes a self-employed person?
Theoretically yes. However, these would need to be supplied under separate contracts. If not, these could also be viewed as a composite supply. If some parts of the work are caught when others would not be (if looked at in isolation), the concern is that everything is caught with a composite supply.
Is a business the end client if they provide full service to another business?
Potentially yes., if it provides fully outsourced service to a client. They should consider whether labour has been supplied or a service. If a service, they are an end client and should consider the IR35 position, unless they are classified as a small entity.
What would the tax implications be if a contractor’s agreement is with an entity outside the UK, but the company also has an entity within the UK?
It depends on whether the end client has a UK presence. The UK entity may create a presence for the overseas company. However, this will depend on the circumstances. If in doubt, assume that the end client is within the scope of the regulations and act accordingly. If the end client definitely does not have a UK presence, the status quo remains with the contractor and their PSC remains responsible for determining whether IR35 applies and paying the liability if applicable.
Menzies is a top 20 leading firm of accountants, finance and business advisors that operate out of a network of offices across Surrey, Hampshire and London, providing our clients with easy access and local knowledge. Described as the ‘best performing firm outside of the top 10’ by Accountancy Magazine, Menzies has over 400 employees and an annual turnover of more than £40m.