Off payroll working rules known as IR35 for engagers
The IR35 rules were introduced in the year 2000 by HM Revenue & Customs, and although they have changed slightly in recent years, there is no sign of them going away any time soon. This article focuses on engagers.
The responsibility to ensure each relationship is IR35 compliant is now on the engager where the engager is not ‘small’. Where the engager is ‘small’, this responsibility remains with the worker. A small company is defined according to the Companies Act 2006.
‘Fee-payers’ will now carry the liability for any tax deemed unpaid as a result of the engagement, provided that everyone in the supply chain fulfils their responsibilities. They also assume responsibility for reporting and deducting tax from payments made to contractors. However, should HMRC find that an end-client hasn’t taken ‘reasonable care’ when assessing IR35 status, the liability will be transferred to them, irrespective of whether they are the fee-payer or not.
This means it is vital that end-clients understand IR35, so that they can make accurate status decisions and, in turn, protect their own liability.
How to comply
- Determine whether the IR35 rules apply for any new contracts with personal service entities, including those engaged directly or through an agency. (As well as ongoing contracts which have not been reviewed before)
- Provide a Status Determination Statement to the next entity on the contractual chain.
Although the IR35 rules only apply for contracts with personal service companies or partnerships, there are very similar rules for when the contract is not with an incorporated company or partnership but is instead a sole trade. It is important that these relationships are reviewed too, as although the IR35 rules cannot apply, if the relationship is deemed to be that of an employment, then the worker could be subject to PAYE, and the engager subject to employer’s National insurance.
Determining whether the IR35 rules apply
This step must be well documented as you must be able to prove that you have taken ‘reasonable care’ to ensure that the correct determination has been made.
Each engagement must be assessed on a case-by-case basis. The rules do now allow for a blanket approach, which if applied, can disgruntle contractors who will feel that they are paying tax as an employee without receiving any employment rights.
HMRC has a tool to determine employment status, named the Check Employment Status for Tax (CEST) tool. HMRC has agreed that they will not challenge the output of this tool, as long as the input is accurate. It is worth mentioning that the tool is fundamentally flawed and ignores key aspects of the IR35 legislation. The CEST tool can be used to check the employment status of personal service companies, sole traders and partnerships.
Rickard Luckin advises that the CEST tool is used as a guideline only, and that any large contracts are reviewed by an IR35 expert. This will provide excellent proof that reasonable care has been taken. If you do not have IR35 expertise in-house, please contact Lee Styles to discuss our services in relation to status determination.
It is important to note that IR35 refers to tax law only. End-clients will need to review all contracts to determine the employment status in employment law too. A worker could be deemed self-employed for tax purposes, even if they are deemed employees in employment law. Individuals who are deemed employees in employment law will have employee or worker rights.
The status Determination Statement
The statement must state your determination of whether the IR35 rules apply and explain the reasons for that conclusion.
There is no official deadline for the issue of this statement but any deemed unpaid tax remains the responsibility of the end-client until it is issued so it is recommended that the statement is issued before 6 April each year.
A worker can appeal the determination from 6 April, in which case you must respond within 45 days of receipt of the appeal.
Any affected contractors should be included on the Full Payment Submission as deemed employees.
The accounts payable team should be aware of which contractors are affected in order to forward the correct information to the payroll department.
If your company does not have processes in place to review new contracts coming in, or you do not know what to look out for when determining whether the IR35 rules apply, please contact Lee Styles at firstname.lastname@example.org or Stephanie Gover at email@example.com, who can provide you with assistance in both areas.
If you have any questions about the above, or would like more information specific to your circumstances, please enter your email address below and we will get in touch: