IR35 and what this may mean for you

A number of tax changes were due to be brought into force in April 2020, including those encompassed by IR35, which covers the relationship between organisations and any contractor using a personal service company (PSC).  Due to Covid-19, implementation of these changes was postponed, but, as matters stand, the Government seems determined that they will go ahead in April 2021.

The new IR35 changes will potentially have a significant impact on how businesses engage with contractors. This is because, up until the changes come into effect, liability rests with the PSC to determine whether the individuals providing the service through the PSC are subject to IR35. 

From 6 April 2021, the onus will shift to the client (i.e. the end user) engaging the individuals. If the client decides that the individual is within IR35, it must notify the person who pays the individual (the ‘fee payer’). They must also inform the individual why they have decided that IR35 applies and allow for an appeal process. The normal rule is that the fee payer who pays the PSC will be responsible for any Pay As You Earn payments and National Insurance Contributions to HMRC. 

There is good news for small companies who engage individual services through an intermediary such as a PSC, as they are not caught by the new rules. A company will be classed as “small” if it satisfies two or more of the following requirements:

• Annual turnover of no more than £10.2 million
• Balance sheet total of no more than £5.1 million
• On average no more than 50 employees

However, if your organisation does not fall within the above definition, you should consider your position and, if necessary, start preparing for the changes.For example, if you are the end-user business you will need to allow for the additional administrative burden required to determine status and deal with any appeals. If you are the fee payer, you will have to consider whether you need to amend your contracts to allow you to make the necessary taxable deductions from the individual’s pay. In addition, there will be increased costs for the fee payer in the form of employer’s NICs for engaging individual contractors who are now deemed to fall under IR35. 

As can be seen, the proposed changes will require a new approach for many businesses so, if you have not already done so, you should consult your tax accountant. In addition, you may wish to look at the issue more strategically and consider changes in how you employ staff or utilise contractors and so input from specialist employment lawyers can be useful in ensuring that employment contracts and other related procedures dovetail correctly with whatever you propose to do. For a confidential discussion about your needs, please contact our specialist Employment Law team.