IR35 Provisions – Changes To The Off-Payroll Working Rules In The Private Sector

The IR35 reforms for the private sector will come into force in April 2021. Below, we have outlined what the reforms to the off-payroll working rules mean if you are a medium or large sized private sector business which receives services from a worker (or contractor) through an intermediary.

What is IR35?

The IR35 provisions or the intermediary’s legislation refer to the United Kingdom’s anti-avoidance tax legislation and was implemented by HM Revenue and Customs in April 2000 as a way to identify those individuals who are not paying the correct tax that they should be.

The legislation aims to challenge those who supply their services through their own company (which includes a personal service company, freelance workers, contractors and partnerships) who in reality should be classed as ‘disguised employees’. The rules do not apply to those who are self-employed.

Given that intermediary workers are not paid by their end client but instead by their own company, they will pay income tax and national insurance contributions differently to an individual, who is classed as an employee. Working in this manner entitles an individual to make significant tax and national insurance savings.

The IR35 provisions are in place to ensure that these individuals, who would otherwise be treated as an employee were it not for the fact that they are providing their services through their own personal company, are caught by the provisions and are taxed like a permanent employee.

How are the IR35 rules changing?

From 6^th April 2021, the off-payroll rules for the private sector will change. This means that all public authorities and medium and large sized business will be primarily responsible for deciding the employment status of “workers” (which includes those individuals carrying out services as contractors).

Responsibility for individuals carrying out off-payroll working will shift from the individual to the business or organisation under which the individual is engaged. This means businesses will have a responsibility to correctly identify employment status to ensure the correct tax and national insurance is paid on any income received.

The changes will apply to all payments made on or after 6^th April 2021. However, the rules won’t apply where all of the contractor’s labour was provided prior to this date.

The rules will not apply to the UK’s smallest 1.5 million businesses but medium and large businesses, and third sector organisations, such as some charities, must implement the changes. As from April 2021, the IR35 rules will apply to all public sector clients and private sector companies that meet two or more of the following conditions:

• They have an annual turnover in excess of £10.2 million;
• They have a balance sheet total in excess of £5.1 million; or
• They have more than 50 employees.

As stated on the Government website, there is also a simplified test which will apply to some clients which takes into consideration annual turnover. The updated rules will apply to those with an annual turnover of more than £10.2 million and are not:

• A company;
• A limited liability partnership;
• An unregistered company; or
• An overseas company.

Additionally, there are provisions which cover associated companies. If the parent of a business group is classified as medium or large, their subsidiaries will also have to apply the IR35 rules.

What happens if I don’t comply with the IR35 provisions?

Failure to follow the changes may mean significant tax penalties apply and large bills imposed on companies who find themselves in default of the legislation.

Recruitment businesses may be specifically concerned about the reforms given that, should an assignment not be correctly identified as falling within the IR35 rules, liability could be imposed to pay increased tax and national insurance on the assignment income.