The reforms from 6 April 2021 place the burden for assessing whether IR35 applies onto the end user of a worker’s services, for all payments by medium and large businesses.
This change will significantly impact the real estate and construction sector, where the use of arrangements potentially caught by IR35 is common. It has the added complexity of dealing with the interaction with the Construction Industry Scheme (CIS).
These changes were originally due to come in from 6 April 2020 but a deferral was announced to 6 April 2021, in response to the spread of coronavirus, to help businesses and individuals.
What will the IR35 rules change?
Under the reforms, any business which is not a small company is now required to undertake an employment status assessment in respect of any of their contractors operating through their own intermediary, whether they work directly with the business or via an agency. Where it is concluded by the end user that IR35 applies, the fee payer (which may be the end user themselves or a recruitment agency or other third party paying the intermediary) will become responsible for accounting for and paying the related tax and NIC, including the additional cost of employer’s NIC, to HMRC.
The Government have confirmed that they intend to use the definition in the Companies Act 2006 to determine whether a business is a small company. Under current legislation, this is broadly a business that has two or more of the following features:
- a turnover of £10.2m or less;
- a balance sheet total of £5.1m or less; or
- 50 employees or less.
The rules can, however, be more complex than this where the business is a subsidiary, part of a group, or associated with another company. Unincorporated entities, such as partnerships, are subject to a simplified test based on whether their turnover for a calendar year exceeds £10.2m.
The new rules apply:
- where the worker personally performs or is under an obligation to personally perform services for a business and certain conditions of liability are met;
- to medium and large businesses (as well as the public sector), who are the end user of the worker’s services;
- fee payers if different, regardless of size (for example, a recruitment agency or small company providing labour); and
- to anyone else, regardless of size, otherwise involved in the middle of the labour party chain for such a contractor.
Where a real estate and construction business fully outsources a whole service, and there are no provisions for a worker to personally provide services to the company outsourcing the arrangements, then the recipient of that service will not have any obligations under the new rules. In this situation, the company taking on the outsourcing contract may be the end user for the purposes of this legislation.
Where the end user of the worker’s services is a small business, the responsibility for assessing the arrangements, and applying IR35, will remain with the contractor’s intermediary. The Government have confirmed that this will be the case even if the worker is supplied via a recruitment business. In this situation, the fee payer, such as the recruitment business, will not have any additional obligations other than the existing requirement to submit a quarterly return to HMRC with details of all workers placed with clients where they do not operate PAYE.
What do businesses need to do to adapt to the IR35 changes?
Medium and large real estate and construction businesses need to act now if they haven't already and should not underestimate the amount of work required to be sufficiently prepared for the change.
As a starting point we would suggest that businesses should:
|①||Assess the number of workers currently being used who operate via ‘off-payroll’ arrangements, such as PSCs, who could potentially be caught by these rules. Remember that this should include workers operating through PSCs sourced via intermediaries, such as recruitment agencies, as well as those engaged directly.|
|②||Discuss internally whether the impact of coronavirus will be likely to lead to more need for the flexibility of off payroll workers than was originally envisaged|
|③||Undertake due diligence on their worker supply chain as transfer of debt provisions apply in the chain under the new legislation transferring PAYE and NICs liabilities where there has been non-compliance in the chain.
|④||Assess the direct and indirect financial impact of the proposed change. For example, new processes and systems will be required to determine if the rules apply to an arrangement and to manage status disputes. Where arrangements are caught, the fee payer will need to account for and pay the related tax and NIC, including the additional cost of employer NIC.|
|⑤||Consider the interaction with the CIS rules.|
|⑥||Be particularly mindful of the potential additional costs when entering into new arrangements or when renewing existing contracts with workers now that will continue beyond April 2021.|
How can RSM help?
Our specialists have detailed knowledge of the rules and practical experience of implementing the changes. We have a multi-disciplinary team of experts who can provide advice and help you adapt to all aspects of the changes, including:
- designing new processes and controls, such as payroll, human resources, finance, data management and IT;
- workshops and bespoke training;
- developing a tailored approach to status determinations and employment status for your business; and
- changes to your budgeting, compliance, contracts and key stakeholder communications.