IR35 (“Intermediaries Regulation”) is a set of complex rules used by HMRC to decide employment status of a worker for tax purposes. If a workerisfound inside these rules, they might have to pay thousands of pounds in tax, penalties along with interest. Off-payroll working rules (often referred as IR35) is an extension of these rules where the responsibility of determining the IR35 status of the worker shifts from the worker’s intermediary to the end client engaging the worker. This can have a huge impact on the worker’s pay and the end client’s liability; thus, immediate attention is required.
The IR35 rules apply to those workers or contractors who provide their services through an intermediary or their own limited company to the clients. The intermediary can be an individual, a personal service company (PSC), or a partnership firm.
The main purpose of IR35 is to ensure workers who would be classed as employees of the end clients engaging them, pay the correct amount of tax and national insurance contributions (NICs). Under IR35, the worker’s intermediary is responsible for IR35 assessment and underlying tax liabilities and penalties, if successfully challenged by HMRC.
The off-payroll working rules often referred to as ‘IR35’, shifts the responsibility of conducting the employment status check from the worker’s intermediary to the end client engaging the worker. Moreover, if the status is assessed incorrectly, the ‘fee-payer’ or the entity paying the worker is liable to pay the tax and NI and the associated penalties and interest to HMRC.
The rules are applicable to all the private sector and public sector organisations. A private sector organisation will be exempt from applying the off-payroll rules if it meets the test for ‘small company exemption’ or is a foreign entity with no UK presence.
For the small company test, an entity needs to satisfy at least two of the following conditions -
A simplified test is also applied to some of the clients. You must apply the rules if you are having an annual turnover of more than £10.2 million and do not have the entity status as any one of the following
Additionally, it is important to note that if the parent company is large or medium-sized, their subsidiaries will also be covered under the Off-payroll working rules.
The off payroll reforms will take effect from 6 April 2021.
From 6 April 2021 onwards, all the medium and large-sized private sector clients and public authorities will have the responsibility to decide their worker’s employment status.
We have to go in a little bit more detail to understand this –
If you are a worker providing service to a public sector client; it is your client’s responsibility to decide your employment status.
If you are a worker providing service to a private sector client, then it is your intermediaries’ responsibility to decide your employment status for every given contract.
As per the new rules, all the public sector authorities and private sector clients (either medium or large-sized) will be responsible to decide whether these rules apply.
In the case where workers provide services to a small private sector client, their intermediary will continue to be accountable for establishing their employment status.
The clients who meet the above-mentioned conditions can start applying the rules on 6 April 2021. In case you have used the simplified test to find out the size of your company, you must start agreeing to the rules from the beginning of the year, following the end of the calendar year when those requirements were met.
For clients who have not used the simplified tests and do not meet the required conditions on 6 April 2021, circumstances may change later. If afterwards, you meet prerequisites for two years in a row, you will have to apply the new rules on a different date. In such a case, you need to employ them from the beginning of the tax year following the end of the filing period for the second financial year.
If you have any questions on the off-payroll reforms and how to apply the rules, please speak to one of our specialists by contacting us on 020 3500 2615 or send us an email on firstname.lastname@example.org