March 11, 2021
As the 6 April 2021 date approaches, we’re receiving more questions about IR35 and Off Payroll rules, so we’ve prepared this video and written answers to your top FAQS.
IR35 and Off Payroll rules explained
Your Frequently Asked Questions
What is IR35? (Is it the same as “Off Payroll”?)
IR35 legislation has been around for over 20 years.
It was introduced in April 2000 when HMRC wanted to tackle people taking advantage of a tax “loophole” by using freelancers and contractors via limited Personal Service Companies (PSCs).
IR35 is also sometimes referred to as the “Off Payroll” working rules but in fact they’re not quite the same. Off payroll in the private sector only applies to ‘medium and large companies’ with a UK connection (more on this later) from 6 April 2021. IR35 applies to small private sector client companies from April.
There are numerous benefits for companies who hire contractors instead of taking on full-time employees:
- They don’t have to pay employer’s National Insurance contributions (13.8%), the apprenticeship level or offer employee benefits
- It allows them to be more agile when responding to changes in demand for their services as the contract workers were easier to let go
These benefits will still apply for people who are legitimately self-employed, but what often happens is that contractors become part of the furniture and can move to having employee status as their role evolves. These “disguised employees” – the ones working like employees – are the ones you need to examine more closely and asking, “Are the right tax and NI being paid?”
Who do the 6 April changes impact?
It affects medium and large private sector businesses with a UK connection who engage contractors through intermediaries – often PSCs.
What is medium or large? (They must meet 2 or more of these criteria)
- Annual turnover exceeds £10.2 million
- Balance sheet exceeds £5.1 million
- Over 50 employees
Why are there changes to IR35?
HMRC believes an estimated £700 million p.a. of revenue is being lost due to contractors working as “disguised employees” and not paying the right tax and NICs. This sum could grow to an incredible £1.3 billion by 2023-24.
IR35 changes were initiated in the public sector in 2017 and the government is now turning its sights on the private sector with the hope that it can bring a much needed boost to the Government’s funds
The focus remains on whether contractors working for you (via PSCs) should be treated as self-employed or as an employee for tax purposes.
It used to be the PSC and individual contractor’s responsibility to decide their correct status for tax purposes. Now, the responsibility falls to the business using the services of the contractor to decide and document the contractor’s employment status.
What can Microsoft Partners do to prepare?
Unfortunately it’s not as simple as seeing what every other company is doing – there will not be a “one size fits all” scenario. However, start by looking at these action points:
AuditCarry out due diligence. What contractors do you have, what services are they providing and to whom? The HMRC’s CEST tool can be a useful starting point for assessing status.
Consider updating T&CsCheck how much control over the individual contractor is built into the contracts – could this be reduced. What does the right to substitution look like – is it absolute?
CommunicateTalk to any individuals that are likely to be affected by the changes. Come to an agreement about the most suitable way forward.
Take professional adviceFor example, if you’re unsure how to assess your risk and how to determine a contractor’s status.
How are Microsoft Partners approaching the new changes to IR35?
Many of our clients are turning to umbrella companies to handle their resourcing needs. Why?
- Umbrella companies will take on the additional administrative requirements arising out of IR35, which is appealing!
- Umbrella companies can employ the individuals and take on some of the associated costs (NI, apprenticeship levy, and the provision of employee benefits) and “hassle” of using contractors especially as some Microsoft Partners’ customers are requiring contractors supplied via PSCs to be pulled out of the service chain entirely.
- They want to protect themselves from liability. A wrong decision about the status of a contractor could leave you exposed. If HMRC challenge it, there’s risk of a tax bill and associated penalties.
What happens if I do nothing?
- You could end up responsible for the payment of tax and NICs if you are the end client and you delay the provision of the status determination
- You could be asked to pay backdated tax and NIC as well as penalties
- You could face a lengthy and time-consuming tax investigation