From 6 April 2021, the taxation of contractors is set to change. But how will the new IR35 rules change off-payroll working for workers and employers? John Kahn of Birketts explains.

What are the IR35 rules?

IR35 rules concern the off-payroll working rules which apply to workers who provide their services through an intermediary.

You may be affected by IR35 rules if you are:

• a worker who provides services through an intermediary
• a client who receives services from a worker through an intermediary
• an agency providing workers’ services through an intermediary

Current IR35 rules

Under current rules, when a contractor works for an end-client via an intermediary, such as a personal service company, if for tax purposes the relationship is deemed to be “employment” then the intermediary is liable for PAYE (income tax and National Insurance). 

However, the government believes there is widespread tax avoidance and that many “self-employed” contractors may actually be “employed” for tax purposes but are undetected because all the risk lies with the intermediary.

New IR35 rules

The new rules, set to come info force on 6 April 2021, shift responsibility in two ways:

• Firstly, the end-client that receives the services must decide the employment status of the contractor and is liable for tax if it fails to do so properly.
• Secondly, provided the end-client determines status properly, the rules shift the liability for PAYE to the “fee-payer”, which is whichever entity pays the intermediary. 

How will the new IR35 rules affect employers and agencies?

In the simplest scenarios, whereby an end-client engages a contractor and pays their personal service company, the end-client will also be the “fee-payer”. It will need to do the status determination statement and will be responsible for PAYE if the employee is deemed employed. 

In other cases, an end-client may pay an agency (or other provider) which in turn pays the contractor’s personal services company. The agency will then be the “fee-payer” and will be liable for PAYE, provided that the end-client has fulfilled its own responsibility to determine the employment status of the contractor (and to pass the status determination statement to the agency and the worker). 

It's important to note that when someone is employed and already subject to PAYE in respect of the engagement, the IR35 rules do not apply. As such, many end-clients are not willing to take on responsibility for determining status. Many of the banks, for example, are choosing to stop using any staff provided via intermediaries or personal service companies. Instead, they are insisting that all staff that they are provided with must already be run through payroll as employees of the agency or other entity that provide them.

How can companies prepare for the new IR35 rules?

In terms of how to prepare, the way the new rules will affect those involved will differ from the perspective of an end-client, a fee-payer or a contractor:

• End-clients will need to determine employment status for tax purposes, to issue status determination statements to any staff who they contract with indirectly, via agencies or personal service companies. They will also need to be ready to operate PAYE and deduct, withhold and pay over to HMRC income tax and National Insurance in situations where they are the fee-payer and an individual contractor is deemed to be employed (or in situations where they fail to properly carry out the status determination and provide the status determination statement).
• If there are agencies or any other entities involved in the chain between the end-client and the worker’s personal service company, then as fee-payer, they will usually be liable for operating PAYE if the contractor is employed (for tax purposes). Many fee-payers or agencies will need to consider amending their contracts to make sure they are still commercially viable in such cases.
• Contractors are likely to receive requests to vary the terms of their engagements to reflect the increased costs and liabilities for clients and agencies. 

Who do the IR35 rules apply to?

From 6 April 2021, whenever individual service-providers provide their services to ‘large and medium-sized’ clients via PSCs, agencies or other intermediaries the new rules will apply.

To qualify as ‘small-sized’ (meaning the old IR35 will continue to apply), a business must meet at least two of the following conditions in the relevant tax year:

• turnover of not more than £10.2 million
• aggregate assets on the balance sheet of not more than £5.1 million
• not more than 50 employees

Note, ‘connected persons’ must be considered in determining whether a company qualifies as ‘small’. This is defined by reference to the Companies Act 2006 and means that a subsidiary of a group will not be regarded as ‘small’ unless the group itself fulfils the criteria. 

To establish whether a contractor will be deemed employed for tax purposes, it is necessary to consider not only what is written in the contracts but also how the relationship operates in practice. HMRC has issued what it claims is an improved ‘Check Employment Status for Tax’ (CEST) tool on its website and although there is no obligation to do so, many will use the CEST tool as their default method to determine status.  The CEST reflects the relevant tests established in case law, considering factors including (but not limited to):

• Mutuality of obligation - is the individual required to provide the services in return for remuneration?
• Personal service - is the individual required to provide the services personally, or is there a genuine right of substitution?
• Control - does the end client exercise a significant degree of control over the way in which the services are performed?

About the author

John Kahn is a Senior Associate in the Corporate Tax Team at Birketts. He has experience advising on mergers and acquisitions, property transactions, partnerships, funds, tax liability insurance, transactional risk insurance, employee incentives, bonuses and share schemes.

See also

Five upcoming employment law changes your company needs to be aware of in 2020

Executive pay ratio reporting: what do you need to know?

Businesses that fail to pay minimum wage will continue to be named

Find out more

Understanding off-payroll working (IR35) (Gov.uk)

Check employment status for tax (Gov.uk)

Companies Act 2006 (Legislation)

Image: Getty Images

Publication date: 18 February 2020