IR35 applies if your contractor (or consultant) would be deemed an employee if they were engaged by you (the client) directly rather than through an intermediary. Under the current IR35 rules, if your contractor is engaged via an intermediary, in many cases their own personal service company (PSC), then that intermediary determines the contractor’s employment status for tax purposes.
It’s estimated that only 10% of PSCs are applying the IR35 rules correctly and therefore new rules will come into effect from 6 April 2021 with the aim of increasing compliance (and the amount of tax that HMRC collects).
What are the changes?
From 6 April 2021, the onus for assessing a contractor’s status will shift to the end client (that is the company receiving the services). Once an assessment is complete, the end client will need to issue a status determination statement to the contractor and intermediary explaining why the new IR35 rules do or do not apply. Where the end client determines the contractor would be classed as an employee if engaged directly then they will be responsible for making PAYE deductions and paying employers NI.
Who will they impact?
The new IR35 rules will apply for all medium and large companies, LLPs and unincorporated organisations who engage consultants through intermediaries.
Only small companies, LLPs and unincorporated organisations will be exempt. To be classified as a small company, LLP or unincorporate organisation you must satisfy two of the following;
1. Have an annual turnover not exceeding £10.2 million;
2. Have a balance sheet total of not more than £5.1 million;
3. Have an average of no more than 50 employees during the financial year.
What do you need to do?
If you aren’t exempt as small and engage contractors through intermediaries, we recommend you carry out an audit of all existing contractors to review the terms of their agreements and the reality of their engagement with you to assess the likelihood that they could be deemed to have employment status.
If you find that your consultants may be considered to be employees, in advance of the change in April 2021 you should put procedures in place to make sure you are assessing their status and issuing status determination statements promptly. You should also ensure that your appeal process is clear.
If you would like support completing an audit and putting plans in place to ensure you comply with the new rules, please don’t hesitate to contact us.