As we are approaching the round-up of 2020, businesses should ensure that considering the IR35 Off-Payroll Working changes from April 2021 is high on the to do list for when we are all back in January. While April may still seem some time away, to ensure compliance with these changes, time should be spent sooner rather than later to implement appropriate processes and procedures for managing contractors going forward.
Recap of the changes
Following delay of implementation from April 2020, it has now been announced that the IR35 Off-Payroll Working Reform will take place in the Private Sector from April 2021. As part of this, businesses who do not qualify for the Small Companies exemption and engage with contractors will see the responsibilities under IR35 move up the chain from the contractor’s own Personal Service Company to the end-user and fee payer.
These responsibilities will include the assessment of individual contractor status and operation of tax and National Insurance deductions for those ‘caught’ by the legislation.
While businesses who meet the Companies House criteria of small and are not caught by any of the anti-avoidance provisions surrounding the small companies exemption do have a hospital pass from April 2021, we would expect this exemption to be removed in the future with the reform applying to all businesses across all sectors.
Some of the key points we would urge businesses to consider as part of ensuring compliance with these changes are as follows;
- Assess current supply chains to ensure all parties are aware of their obligations under this new legislation from April 2021
- Engage in discussions with contractors and clients on these changes
- Review current contracts and working practices in place and make alterations where necessary
- Consider the impact any additional liabilities due in respect of ‘inside’ IR35 contractors will have on the business’ margins and agree approach surrounding rate renegotiations
- Ensure a process is in place for completing contractor assessments and appeals
- Ensure a process is in place for operating PAYE on relevant invoice values, with consideration for engagement payment terms
Meaning of an intermediary
Over the past few months we have seen some clarifications on the draft legislation published by HMRC. These clarifications have been broadly surrounding the meaning of ‘intermediary’ for the purposes of this legislation.
In the original draft legislation this specifically stated that the worker would be required to to have a material interest in the intermediary (such as ownership or control of their own PSC) to fall within the definition of “intermediary” for the new Off-Payroll Working rules to apply. This was then changed to suggest that all businesses providing workers to another business would be classified as intermediaries posing risk that this would see umbrella companies and agencies classed as intermediaries rather than independent businesses within the supply chain and in most cases the fee-payer.
Following the evident concerns being raised, HMRC have now confirmed that the change was never intended to capture businesses such as umbrella companies and agencies as intermediaries. Therefore, where an agency or umbrella company operates PAYE properly on income, the new changes will not have an impact and similarly, where a worker is provided via their own PSC through an umbrella company or agency, the umbrella company or agency will be considered the fee-payer and responsible for operating any PAYE deductions if the end-user deems the worker to be ‘caught’.
Following these discussions, HMRC have provided the following statement - "A technical change to the off-payroll working rules will be made in the next Finance Bill. This will ensure the legislation operates as intended from 6 April 2021 for engagements where an intermediary is a company. The change will correct an unintended widening of the definition of an intermediary, which went beyond the intended scope of the policy." - Jesse Norman, The Financial Secretary to the Treasury
In many cases businesses may engage with overseas based clients and may be wondering what this will mean for applying the Off Payroll Working Rules from April 2021.
In the original guidance and legislation published by HMRC prior to the delay earlier this year, it was apparent that the IR35 rules would continue to apply and would fall to the highest UK based company in the supply chain if the end-user was based overseas. However more recently this has been updated to confirm that where the end-user is based wholly overseas, the new legislation will not apply and instead it will remain the responsibility of the PSC to determine the worker’s status under IR35, ultimately following the rules as they are currently.
It is important to note however that the end-user must be based overseas and have no connection to the UK by way of a permanent establishment either through the overseas Company itself or a connected branch for the above to apply.
Similarly, if an individual is non-UK resident carrying out work overseas through their own PSC, assuming no liability to UK tax or National Insurance arises, no action would be required under the new legislation.
Should you require any support with these changes and how they will impact your business, please do not hesitate to visit our dedicated IR35 page for more information or get in touch with one of our specialist IR35 team by emailing IR35@aab.uk.