IR35 - Everything Independent Schools Need to Know

Although this change took effect earlier in the year, given the other significant operational priorities at that time, we are seeing schools now trying to get to grips with the issues. We summarise the changes introduced by the new IR35 regulations, explore their implications for independent schools and how to ensure compliance.

What Is IR35?

The IR35 Regulations apply to individual workers who provide their services through an intermediary (such as a Personal Services Company). The purpose of the new IR35 rules is to ensure that those workers who would have been employees, if they were providing their services directly to the client or hirer, would pay broadly the same Income Tax and National Insurance contributions as employees.

Previously, it was the individual worker's responsibility to determine whether the rules applied to them and ensure that the intermediary paid the appropriate employment taxes. However, from 6 April, the onus as to whether the rules apply and whether employment taxes should be deducted at source now rests with the organisation or in this case the independent school or charity which receives the services provided by contractors.

What Are The New IR35 Rules?

From 6 April 2021, the IR35 regulations were extended to private sector organisations such as independent schools if they are medium or large-sized businesses and connected to the UK.

Under the new IR35 rules, if an independent school contracts for the provision of services of an individual worker (such as a sports coach, music teacher or IT professional) through an intermediary, then the school will be responsible for determining whether, were it not for the presence of the intermediary company, that individual is actually an employee for employment tax purposes.  If so, they will be required to deduct employment taxes which includes income tax, employee and employer national insurance contributions and any apprenticeship levy if applicable.

The new rules will only apply to those independent schools who are deemed to be 'medium and large' businesses.  This is likely to capture most schools as it is based on meeting at least two of the following conditions:

• an annual turnover of more than £10.2m
• a balance sheet total not exceeding £5.1m
• more than 50 employees

It is important to note that schools which form part of a larger group of schools, the test will examine the financial turnover and value of assets for the entire group of schools.

How Will The New Rules Affect Independent Schools And The Individuals Involved?

It will be necessary for schools that are caught by these provisions to make a Status Determination Statement (SDS) for each individual working for the school through an intermediary and deciding whether they are an employee or not for employment tax purposes. To determine whether an individual is an employee, schools should use the HMRC on line tool Check for Employment Status Test (CEST) as a starting point which lists a variety of factors which are indicative of the individual being an employee, such as:

• Whether there a substitution clause in the contract of services for the duration of any assignment?
• Does the school control what services the individual provides and how they deliver them?
• Does the individual need to bring their own equipment?
• Is the worker paid on a yearly or termly basis or as and when work is done, is there any financial risk to the individual delivering the service?

There are also a number of HMRC Employment Status Manuals giving further guidance.

Schools should complete a SDS for all individual workers who supply their services through an intermediary regardless of whether they are considered to be employees or not. Once this has been done, if this supports that an individual is genuinely self-employed this information can be retained on file.

Where it indicates that an individual may be needed to be employed then it will be necessary to consider the options:

• Ensure that tax and NI is deducted based on 'deemed employment' which may require a re-negotiation of commercial terms. Schools will want to ensure that their contracts permit for any increased costs to be met by the individual.
• Consider if they should be offered employment contracts, although this will obviously require the payment of employer National Insurance contributions and income tax from their salary as well as affording those individuals employment rights and benefits.
• Assess if there can be changes to working arrangements so that they are not deemed to be employed under the status test.

If schools use recruitment agencies to hire individual contracting through their personal service companies, there is still an obligation on the school to undertake the SDS and communicate the employment status of the individual to the agency who will be responsible for making the employment tax deductions.

Finally, although these rules only relate to individuals contracting through an intermediary, schools will be aware of the increased focus on all self-employed contractors and so a broader review to regularise arrangements is likely to be worthwhile.

If you would like further information on how the IR35 will impact your school, please contact Lorna Scully in our Employment Law team on 07500 846624, or complete the form below.