IR35 – where are we now?

IR35 has been one of the most contentious pieces of accounting legislation since its introduction in April 2021 as HMRC works to prevent those it deems are employed by an organisation taking their income through a separate company.

Previously, any large company employing a contractor for services did not need to consider that contractor’s status for tax – it was the responsibility of the contractor, not the company to determine how that person dealt with their tax affairs.

However, with the advent of IR35, the onus was placed instead on the company employing the contractor, which has led to a number of court cases between HMRC and those challenging this approach. The companies – known as end-users – who need to consider the IR35 position of contractors they are working with must have a turnover of more than £10.2m, a balance sheet of more than £5.1m or more than 50 employees.

What are the latest cases telling us?

There have been many cases so far where service providers using their own limited companies have chosen to legally challenge the approach taken by HMRC and their employment status under IR35. One of the latest is S & L Barnes vs HMRC. Stuart Barnes is the ex-England rugby union player who works as a pundit for Sky and uses a company to provide his services for the broadcaster, and also for the newspaper columns he writes for The Times and the Sunday Times among other work. HMRC claimed Mr Barnes owed more than £695,000 in unpaid tax and National Insurance contributions as it believed he should have been considered employed by Sky, a position he challenged.

During the 2013-14 to 2018-19 tax years, Mr Barnes earned around 60% of his income from Sky, but this subsequently fell when Sky’s rugby coverage reduced. Case precedents created in particular by the Ready Mixed Concrete case resulted in a so-called ‘three limbed’ approach being taken to determine whether someone should be considered an employee of the company.

What does this mean?

This is a relatively complex legal method which considers whether or not the ‘employer’ has sufficient control over the employee’s work, along with a mutual obligation between the ‘employee’ providing the services and the employer who provides the work and pays for it.

If both exist, then a further test is applied to decide whether the ‘employee’ is in a service contract, or one providing services.

In the case of Mr Barnes, the Tribunal found that he was not to be considered an employee of Sky in this instance as he had a high degree of autonomy in the way he worked with Sky, and also worked with many other organisations using his specialist rugby knowledge at specific times which he was at liberty to choose.

However, every case is different, and each turns on whether certain conditions and parameters are met. This is why the application of IR35 has been so complex for companies to understand. Yet this proves that while HMRC is determined to focus on IR35 cases, there are instances where people can be engaged for work outside of IR35.

Let us help you

If you need to determine whether someone you are working with comes under IR35 rules, then please get in touch and we can help you to get this important decision right.

Off-payroll working back on the horizon

The extension to the off-payroll working rules was put on hold as a result of the COVID-19 pandemic. However, the legislation has now been implemented and the new rules will come into effect from April 2021 – one year later than originally planned. As the Coronavirus Job Retention Scheme draws to a close and businesses assess their future staffing requirements, the impact of the off-payroll working rules cannot be overlooked.

Scope

The extended off-payroll working rules only apply to ‘medium’ and ‘large’ private sector organisations. The definitions are taken from the Companies Act 2006.

An organisation is medium or large for these purposes if at least two of the following apply:

• annual turnover of more than £10.2 million;
• balance sheet total of more than £5.1 million;
• more than 50 employees.

A simplified turnover test applies to organisations which are not a company, a limited liability partnership, an unregistered company or an overseas company. Such organisations are within the rules if their turnover is more than £10.2 million.

Obligations under the rules

The new rules impose a number of obligations on medium and large private sector organisations that engage workers who provide their services through a personal service company or other intermediary.

If you fall within this category, from 6 April 2021, you must determine whether the off-payroll working rules apply. This is the case where the worker would be an employee if they provided their services to you directly, rather than through an intermediary. You can use HMRC’s Check Employment Status for Tax (CEST) tool to check a worker’s status.

Once you have reached your determination, you must give a copy of it to the worker, and to any other parties in the chain. You must also provide them with the reasons for reaching the decision that you reached. Giving the worker a copy of the CEST output will tick this box. You must also keep a copy of the determination and the reasons for reaching it for your records.

If your worker does not agree with the determination, you must consider their reasons for this. If, after reconsideration, you feel that the original determination is correct, you must let the worker know. If, on reflection, you feel that the original determination was incorrect, you must issue a new determination.

It is important that you make a determination of the worker’s status and give it to the worker. If you fail to make a determination, you will be liable for tax and National Insurance on payments made to the worker’s intermediary, even if the engagement is one that would fall outside the off-payroll working rules.

Off-payroll working rules apply

If the determination is that the worker would be an employee if they provide their services to you directly, the off-payroll working rules apply. Where this is the case, you (or the fee payer if this is different) must:

• calculate the deemed direct payment to account for employment taxes and National Insurance contributions associated with the contract;
• deduct income tax and employee’s National Insurance contributions from the payment to the worker’s intermediary;
• pay employer’s National Insurance contributions;
• report the payments and associated tax and National Insurance to HMRC under real time information; and
• apply the apprenticeship levy and make any payments necessary.

Off-payroll working rules do not apply

If the determination is that the off-payroll working rules do not apply, you can continue to make payments to the worker’s intermediary gross, without deducting tax and National Insurance.

Small private sector organisations

The extended off-payroll working rules do not apply to small private sector organisations. Consequently, if you are an organisation that is categorised as small, and you engage workers who provide their services via a personal service company, you do not need undertake a status determination. Instead, you continue to pay the worker’s intermediary gross without deducting tax and National Insurance.

In this situation, the IR35 rules continue to apply; the worker’s intermediary is responsible for deciding whether the rules apply, calculating the deemed payment and accounting for tax and National Insurance if they do.

Plan ahead

Speak to us to find out what you need to do to ensure that you are ready for the extended rules when they come into force in April 2021.

Off-payroll working rules delayed

In a surprise move, the Government have announced that the reforms to the off-payroll working rules have been delayed by one year and will now come into effect from 6 April 2021. The delay is to help businesses affected by the COVID-19 pandemic. The delay will affect medium and large private sector organisations engaging workers through personal service companies and other intermediaries, and workers providing their services to such organisations in this way.

As the announcement of the delay came only three weeks before the reforms were due to take effect, it comes too late for many. To avoid having to deal with the new rules, many organisations have already taken the decision not to use workers providing their services via an intermediary, opting instead to place all workers ‘on payroll’.

Impact of the delay

The extent to which you will be affected by the delay will depend on whether you are a small, medium or large private sector organisation, a public body or a worker providing their services through a personal service company or other intermediary.

Medium and large private sector organisations

Medium and large private sector organisations (as defined for Companies Act 2006 purposes) who engage workers providing their services through an intermediary can carry on as normal for 2020/21, paying the intermediary gross. They will not need to undertake status determinations and deduct tax and National Insurance from the deemed payment to the worker’s intermediary where the worker would be an employee if their services were provided directly. A further plus is that they will not yet need to pay employer National Insurance contributions on the deemed payment. These changes will now become a reality from 6 April 2021 rather than from 6 April 2020.

Workers providing their services through an intermediary to medium and large private sector organisations

Had the reforms gone ahead as planned from 6 April 2020, the responsibility for determining whether the off-payroll working rules apply would have shifted to the end client where a worker provides his or her services to a medium or large private sector organisation through an intermediary. This shift will now not take place until 6 April 2021.

As a result, the worker’s intermediary will continue to be paid gross, regardless of whether the off-payroll working rules apply. Responsibility for determining whether IR35 applies remains with the worker’s intermediary for 2020/21. If it does, the worker’s intermediary must calculate the deemed payment at 5 April 2021 and account for tax and National Insurance on that deemed payment.

A word of caution here – if the worker would be an employee of the end client if they provided their services directly rather than through an intermediary, the worker’s intermediary will need to operate IR35. While HMRC have said that they will not use off-payroll working determinations to check IR35 compliance for past years, the delay in implementing the reforms is not a licence to ignore the rules.

Small private sector organisations

The extended off-payroll working rules do not apply to small private sector organisations. If you fall into this category and engage workers who provide their service through a personal service company, you should continue, both for 2020/21 and beyond, to make payments to the worker’s intermediary gross.

If you provide your services to a small private sector organisation via a personal service company, your personal service company must determine whether IR35 applies, and apply the IR35 rules if it does.

Public bodies

The delay has no impact on public bodies engaging workers through intermediaries. The rules as they apply where the end client is a public body were reformed from April 2017, and these will continue to apply for 2020/21 (albeit without the tweaks needed to make the rules suitable for application to the private sector).

The delay has no impact on workers providing their services through an intermediary to a public sector body either. The public sector body will continue to determine whether the off-payroll working rules apply, and deduct tax and National Insurance from payment where they do.

Contact us

If you are unsure of how the off-payroll working rules apply to you, please contact us for advice.