IR35 - A Reminder of the Important Changes in 2021
This article details the changes that were implemented from 6 April 2021, and how these affect you.
Our previous article published on 13 November provides detail on what IR35 is and whether it applies to you.
What Changed?
From 6 April 2021, the IR35 rules began to apply to medium and large businesses in the private sector and not only public sector clients. The obligation is on the hirer/client to make a status determination assessment as to whether the assignment to be entered into with a contractor operating through their Personal Service Company ("PSC") is of employment and whether PAYE taxes should be deducted.
The party that pays the PSC is responsible for making the necessary deductions if the arrangement is caught by IR35. Where the hirer/client contracts with the PSC directly, it will be regarded as the paying party for the purposes of deducting taxes. Where the hirer/client's contract is with an employment business it will be the employment business that has to make the necessary deductions if the assignment is caught by IR35.
Is My Business Affected?
The new rules will have a significant impact on contractors working through a PSC and all large and medium-sized end hirers/clients in the private and public sector.
Hirers/clients are caught if:
- their turnover exceeds £10.2 million
- their balance sheet exceeds £5.1m
- they have more than 50 employees.
What Should I Be Doing Now?
Responsibility is on the hirer/client to determine the status of the contractor operating through their PSC and to make sure taxes are properly deducted.
Hirers should communicate with the contractor regarding the outcome of the status determination assessment and whether the assignment is inside or outside IR35 with reasons. Hirers/clients should be mindful that there is a right of appeal against assessment.
When hirers/clients make a status determination assessment, they should take into account various factors such as:
- the nature of the business
- the duties of the contractor and whether they are similar to other workers or whether they are employed or self-employed
- check the contractor's employment status for tax
- look at the relevant Employment Status Manual ("ESM") which provides further guidance about the criteria regarding status.
HMRC expects each hirer to undertake a complete and thorough determination and to “act in a way as a prudent and reasonable person in the hirer’s position”. HMRC makes it clear that if a hirer has limited knowledge, it has an obligation to find out about its obligations and responsibilities. Hirers should note that ignorance of obligations is no defence.
Businesses which engage consultants should also identify those contracts where services are supplied through a PSC and IR35 applies. They should conduct a thorough audit of their terms and conditions and consider whether new contracts are required to manage the risks. This may require terminating existing contractors arrangements although this would require a review of the existing terms of contracts and notice periods.
How Can We Help?
Our employment lawyers would be best placed to provide you with the relevant advice and next steps to manage the changes in relation to IR35. Michael Delaney, an employment partner at VWV has expert knowledge in the area and can assess whether these changes would apply to your business.