Broadly speaking, IR35 is a piece of legislation which is designed to ensure that any workers engaged through an intermediary and which are deemed within its scope, pay roughly the same amount of tax and national insurance contributions as employees in equivalent positions. It can be referred to as the Off-Payroll Working rules.
On 6th April 2021, the government is extending the off-payroll rules (which have applied in the public sector since April 2017) into the private sector. The new rules will apply to payments made to intermediaries such as personal service companies (PSCs). Importantly, the tests for IR35 status are not changing but the responsibilities for making the IR35 status decision and deducting tax and national insurance are.
As of 6th April 2021, the PSC will no longer be responsible for managing IR35. Instead, the client must assess the IR35 status of each engagement and when a role is deemed “inside” IR35, the fee payer (organisation making payment to the PSC) assumes responsibility for the deduction of tax and national insurance before making payment.
If you are a genuine contractor, freelancer, interim or consultant who is in business on your own account, you should not be affected by IR35, providing your client has taken the necessary steps to show reasonable care in the determination of the status of your engagement.
HMRC have stated that all organisations must now be able to demonstrate that they have taken ‘reasonable care’ in determining the status of temporary workers and that this determination has been shared with all parties in the supply of that worker. HMRC defines reasonable care as to “act in a way that would be expected of a prudent and reasonable person in the client’s position”. Simply classifying every role in a ‘blanket approach’ will not show reasonable care and could still result in a fine.
As a result of the changes, the liability of an incorrect determination now shifts from the worker to the organisation paying the worker. This will usually be an agency, however when the worker is paid directly by the end client, the end client will assume liability for the resulting back taxes and national insurance payments.
In addition to these financial penalties, there is a risk that without a comprehensive process to determine IR35 status, a company’s ability to attract and retain skilled temporary workers will diminish, leaving them unable to compete for industry leading talent.
We work with our clients to create a set of comprehensive and robust compliance processes. Comprising a full evaluation of your existing workforce and assessment of current contractor engagement, we work together with key internal stakeholders to fully assess working practices along with other factors affecting IR35 status. The implementation of new engagement procedures is followed up by the development of an ongoing internal audit procedure designed to display to HMRC that ‘reasonable care’ has been taken throughout the cycle.
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