• Date

    29 Jan 2021
  • Category

    Employer Solutions, Tax, Accounting, Payroll

IR35 – The journey to April 2021 and the actions to take

When the impact of COVID-19 magnified in March 2020, the Chancellor deferred the introduction of new IR35 rules for the Private Sector, which were originally due to commence from April 2020. The new rules will now come into force from 6 April 2021 and will apply to medium and large businesses engaging with ‘Off-Payroll’ workers provided via an intermediary, such as a Personal Service Company (PSC). These are significant changes and businesses need to act now to ensure they are ready.

Despite the continued challenges COVID-19 presents to the UK economy, there is no indication from the government there will be a further deferral to the introduction of the proposed changes to IR35 between now and April 2021. Businesses should therefore prepare now for the changes, either picking up from where they left off when it was originally deferred, or by taking the necessary steps to ensure readiness.

What are the rule changes?

Currently, workers who provide their service to a private sector end user via an intermediary, such as a PSC, are responsible for determining if IR35 applies to any engagements they work on.

IR35 is legislation that, for tax purposes, looks through the existence of the worker’s company and considers whether the arrangements between the engager and the worker would be akin to an employment but for the worker’s company. Where it is the worker’s company, they are responsible for any appropriate PAYE and national insurance.

From April 2021 “medium” and “large” businesses (as defined) will be required to consider if IR35 applies to an engagement, where a worker is provided via an intermediary. The responsibility is therefore moving up the engagement chain from the PSC. Small end user businesses are exempt from this change and will be able to continue to engage these workers without considering their IR35 status.

A business will be defined as “small” if it meets two of the following conditions:

  • turnover – not exceeding £10.2 million
  • £5.1 million or less on the Balance Sheet
  • the number of employees does not exceed 50

A business that considers itself small will still be required to apply the new rules if it is part of a group such that the group does not meet two of the three conditions above.

What will be the impact?

Where the engaging business determines the worker is within the scope of IR35 it will have to take the following steps.

  • If the business is the ‘payee’ of the worker’s company, it will be required to add the worker to its payroll as a ‘Deemed Employee’ and operate PAYE, withholding tax and national insurance from payments to their company.
  • In addition to putting the worker on your payroll, you will be required to notify the worker in writing of your status determination decision.
  • If a worker is provided to the engager via an agent, you must notify the agent as well as the worker of your status determination. If the agent is the ‘payee’ of the workers company, it should put the worker on its payroll and withhold tax and national insurance.
  • If it is not the payee, it must pass the determination to the next entity in the supply chain and that entity will then be required to apply the deductions.

What steps should we take between now and April 2021?

What type of workers commercially do you need to engage with:

  • employees (only engaging with employees)?
  • PSC workers (outside and inside of IR35)?
  • agency workers (PAYE operated)?
  • workers provided via Umbrella Companies?

Phase

Actions

Phase 1

Set up a project team

Identify key stakeholders within the business, including Procurement, Resourcing, HR, Tax, Payroll and Legal.

Confirm responsibilities for addressing the requirements of IR35 and any educational needs.

Phase 2

Develop your ‘off-payroll’ resourcing strategy

Consider what the resourcing needs of the business are post April 2021.

What type of workers commercially do you need to engage with:

  • employees (only engaging with employees)?
  • PSC workers (outside and inside of IR35)?
  • agency workers (PAYE operated)?
  • workers provided via Umbrella Companies?

Consider the impacts for the business if current engagements are within IR35 from April 2021, and how the business will adapt and engage with these workers from April 2021.

Phase 3

Identify current PSC workers

Identify all PSC workers engaged by the business, either directly with the PSC, or via an Agency.

Of those PSC’s identified confirm those who have contracts that will continue beyond 5 April 2021.

Phase 4

Assess the workers status

A process should be implemented to gather facts of the engagement of the workers identified at Phase 3 in order to assess the worker’s status for IR35.

The process should include both contractual and actual working practices in order to determine the correct status for the workers.

The business should apply a consistent approach to making its determinations. The Check Employment Status for Tax is a free tool provided by HMRC and can be helpful in making these decisions and other commercial tools are also available, which take a more comprehensive approach to determining the status of workers.

Engagers must take reasonable steps to reach the correct status determination.

Phase 5

Status Determination Statements

Where the status of the worker is determined to be within the scope of IR35 and the business is going to engage with the worker’s company, a Status Determination Statement (SDS) should be issued to the worker and where an agency is in the supply chain to the agency.

SDS should include your decision in respect of the workers status and the reasoning behind the decision.

Phase 6

Appeals

Both worker and agent provided with an SDS can ask the engager to justify their determination. The engager should include in the process steps to respond to these requests within the 45-day deadline. Failure to meet the deadline could result in liabilities for tax, national insurance and penalties.

Phase 7

Periodic reviews and new engagements

The status of workers can change over time and the process should therefore include periodic reviews to confirm what the status of the workers is on an ongoing basis, either at the point contracts are renewed or annually if the contractual arrangement is for a period exceeding 6 months.

 

How can we help?

The Azets Employment Tax team can support businesses with all aspects of the new IR35 rules, from helping to identify workers you need to assist, developing a strategy and process for assessing worker status and sharing your determinations with your supply chain. Please contact a member of our Employment Tax team or your usual Azets contact if you would like further guidance and support. 

Watch our webinar

On 11 & 17 February 2021 our expert advisors David Hedges, Jez Howson, and guest Speaker Duncan Smart from Shorterm Group, hosted a webinar, explaining the practical implications of the imminent IR35 new rules, how they could impact your business and what you should be doing to prepare. 

To watch our webinar recording and download a copy of our slides, click here

In a recent poll, we found 54% of respondents said they have started preparations but were ultimately unprepared for 6 April 2021, and 34% said they were not prepared at all for the imminent IR35 changes. At Azets, we are here to provide help wherever it is needed. 

If you have any queries regarding the areas discussed throughout our webinar, have any other Employment Tax related questions or would like to arrange a call with a member of the team, please get in touch with your local Azets contact or a member of our Employment Tax team.

About the author

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Dave Hedges

Partner Southampton
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