IR35 CHANGES NEXT APRIL 2021
Consultants as well as medium and large entities need to ensure they are prepared for the new tax rules for off-payroll working. They were previously due to be introduced in April 2020 but were delayed for a year due to the Coronavirus crisis.
What do the changes mean for your company?
The new rules mean that when an entity is working with individuals who provide their services through their own personal service company, the entity will be responsible for deciding if tax should be deducted at source from payments made to the company.
If the entity determines an individual is working as if he or she were an employee of your entity, the basic position is that the entity will need to deduct income tax and employee NICs from payments made to the consultants company, and pay employer NICs as well.
If your personal service company is being paid via an agency that has the contract with the principle entity (the customer), the agency will be responsible for the deduction of these payroll taxes when it pays the personal service company.
However, the entity as the end user of the services, will need to tell the agency, as well as the consultant trading via a personal service company, whether the off-payroll working rules apply.
The new rules will bring about a number of administrative requirements, including the obligation to issue “status determination” statements, and the need to establish a dispute resolution process.
Will these rules apply to all entities?
The new off-payroll working rules will apply to medium and large organisations, with an exemption from these rules being available for small organisations.
The test for determining whether an organisation is ‘small’ is taken from the Companies Act 2006. To be treated as small, two of the following three conditions need to be satisfied:
- Annual turnover of less than £10.2 million
- Balance sheet total gross assets of less than £5.1 million
- Fewer than 50 employees.
If the personal service company is working for a “Small Entity” then these new rules do not apply.
- There is a risk that the principle entity (the customer), in deciding whether the rules apply to an engagement (i.e. whether an individual is working as an employee), will make the wrong decision. The rules here can be very complicated and difficult to apply. HMRC has produced a tool to help, but it is widely criticised for not accurately reflecting the full range of case law on employment status.
- Where there is a failure to comply with these rules, HMRC can potentially seek payment of the relevant tax and NICs from the principle entity.
- There will be an additional cost to the principle entity for using a consultant where the off-payroll working rules apply. This could be up to 14.3% (based on employer NICs of 13.8% and the apprenticeship levy of 0.5%). Therefore it is expected that firms that want to continue using people trading via a personal service company will seek to pass on these extra costs to the personal service company by reduced daily or monthly rates.
- Consultants who trade via a personal service company may start to prefer working for smaller businesses who will not deduct tax at source from payment of their invoices.
WORK TO DO NOW
- Assess your workforce to identify any consultants who may fall under the new rules.
Perform status determinations and review the contracts you currently have in place.
- Review your processes and systems to ensure that contracts for personal services are identified and handled correctly.
- If you have determined that the consultant is an employee status, then you must ensure the correct payment is processed through payroll calculations.
- Creating a dispute resolution policy in case consultants dispute your determination.
Consultants trading via a personal service company
- Start discussions with your principle entity or agency now to determine if you will be moved to employee status.
- Ask to see the Status Determination and challenge this if you feel it is wrong
- Perhaps look for new contracts with “small entities” rather than medium of large entities
- Ultimately discuss this with your accountant as you may wish to dissolve your personal service company and withdraw any funds in the company in a tax efficient way. PWA is happy to advise you on the options available.