This article was updated on 31 July 2020 to reflect confirmation that IR35 rule changes will take effect from April 2021.
The Government has confirmed that the off-payroll working rules (IR35) will be reformed from April 2021. It’s important not to underestimate the impact of these changes and to start preparing for them now.
The impact of the changes will vary for the following:
- private sector businesses;
- recruitment sector businesses;
- public sector organisations;
- real estate and construction businesses; and
- individuals providing services via Personal Service Companies (PSCs).
Overview of the IR35 changes
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 ongoing spread of coronavirus, to help businesses and individuals.
The impact of these changes should not be underestimated, and sufficient preparation will be crucial. As a result of Covid-19 many businesses are re assessing their resource requirements and this may mean more demand for the flexibility of off-payroll workers.
Who is likely to be affected?
- Around 60,000 engager organisations, predominantly medium and large-sized businesses outside the public sector that engage with individuals through intermediaries such as personal service companies (PSCs).
- Public sector organisations who will be affected by changes designed to improve the operation of the rules, for example around the employment status disagreement process.
- Recruitment agencies and other intermediaries, around 20,000 of whom supply staff through PSCs.
- Individuals who supply their services through an intermediary, such as a PSC, and who would be deemed employed if engaged directly.
Overview of the measure
The current off-payroll working rules (IR35) have been in place since 2000. They were designed to make sure that an individual who works like an employee, but through their own intermediary such as a limited company, pays broadly the same Income Tax and National Insurance contributions as other employees. The rules do not apply to the self-employed who should be subject to separate status checks.
The reform, which is based on the existing public sector IR35 rules, places the burden for assessing whether IR35 applies onto medium and large private sector end users of the worker’s services for all payments made by businesses in the private sector from 6 April 2021.
Where it is concluded by the end user that IR35 applies, the fee payer (which maybe the end user 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 the employer’s NIC, to HMRC.
An estimated 1.5m small organisations are exempt.
Small company exemption
In the private sector the new rules will only apply to medium and large businesses that are the end user of the worker's services who have a UK connection for a tax year and to the fee payer, if different, for example a recruitment agency.
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 intermediary such as the PSC.
A small business will be defined by the Companies Act 2006, 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; and/or
- 50 employees or less.
Special rules apply for joint ventures, subsidiaries and connected persons
End user’s will be required to provide to a person (likely to be a PSC or fee payer) on request a statement as to whether in their opinion they qualify as small for the tax year specified in the request generally within 45 days of receipt.