The off-payroll working rules, known more commonly as IR35,

were introduced in 2000. Their purpose is to stop independent

contractors who operate through an intermediary gaining

unfair income tax and national insurance advantages when,

in essence, they would be classed as an employee if they were

contracted directly.

Although the legislation has been around for close to two decades, HMRC has

claimed that levels of non-compliance have been high, with only 10% of those

who should be applying the rules doing so.

To combat this, HMRC introduced reforms to the public sector in 2017, which

shifted the responsibility of determining whether IR35 applies from the worker's

intermediary to the public sector body or agency paying the worker's intermediary.

Despite mixed reviews of the effectiveness of the public sector reforms, Budget

2018 announced an extension of the off-payroll working reforms to the private

sector, with the new rules applying from April 2020 (now delayed to April 2021).

Following the release of draft legislation in July 2019 as part of Finance Bill

2019-20 and accompanying guidance, there is plenty for accountants and

their clients to unpack in the run-up to 2020.

This guide highlights key points from the guidance.

From 6 April 2021, medium and large private sector organisations

will be responsible for assessing the employment status of

individuals who provide services to them through an

intermediary, typically a Personal Service Company (PSC).


Where an individual is considered to be a disguised employee within the scope

of IR35, the entity that pays the contractor's intermediary (the "fee-payer") will

be responsible for withholding tax and National Insurance Contributions (NICs).

Typically, the fee-payer is likely to be the client or an agency.

It's worth noting that, while the reforms essentially change who the responsible

party is for determining IR35 status (shifting responsibility for determination from

the contractor's PSC to the end client) the underlying IR35 legislation has not

changed as a result of these reforms.

While medium and large-sized organisations, agencies, and

contractors that operate through a PSC will have to consider

the implications of the new legislation, small organisations are

exempt from the new rules.


The draft legislation uses the Companies Act definition of small, where an entity

is considered small if two or more of the following conditions are met:

Annual turnover not more than £10.2 million;

Balance sheet total not more than £5.1 million;

Not more than 50 employees.

Unincorporated organisations will be considered small where turnover does not

exceed £10.2 million.

Where an organisation is exempt from applying the new rules, the existing IR35

procedure will apply (i.e. it will remain the responsibility of the PSC to make an

IR35 determination).

As part of the reforms, medium and large organisations should

provide a worker with a Status Determination Statement (SDS) which

outlines both the decision reached by the organisation as to the

worker's employment status as well as the reasons behind the decision.


The worker should also pass on the SDS to the agency or other organisation the

worker contracts with until the SDS reaches the party immediately above the

worker's intermediary, who is classed as the fee-payer or deemed employer.

A fee-payer must be resident in the UK or have a place of business in the UK.

Crucially, if a party in the labour supply chain fails to pass the SDS to the next

relevant party, then that entity will become the fee-payer.

A fee-payer is responsible for calculating the deemed direct payment, which

accounts for employment taxes and NIC associated with the contract.

The fee-payer should withhold the relevant employment taxes and employee NIC

from the payment to the worker's PSC and also pay employer NIC. These amounts

should then be reported to HMRC through the Real Time Information (RTI) system.

Notably, the employment allowance cannot be used against deemed employee payments.

If a worker or deemed employer disagrees with an SDS, a client-led appeal process is

available. As the legislation stands, clients will have 45 days to respond to a worker

or deemed employer where a status determination has been challenged, either to

inform them that the client's initial determination has been reviewed and is deemed

correct or to issue a new SDS.

The draft legislation has been subject to a fair amount of criticism,

with major accountancy and tax bodies, including the ICAEW

and GOT, highlighting issues with the draft legislation and

accompanying guidance, such as:


Lack of clarity over status determinations

As small organisations are exempt from the new rules, the responsibility for making

status determinations remains with the worker.

However, as small organisations are not required to notify contractors that they are

small, this could cause confusion for workers, who may not be aware that the onus

remains with them to determine the IR35 status of an engagement.

Additionally, the client-led disagreement process over an SDS determination has

been criticised, with both the CIOT and ICAEW highlighting that the legislation

does not place any time limit on when a worker or deemed employer can object

to an SDS determination.

This means, in theory, years could pass before any objection is raised, which could

lead to increased uncertainty for clients.


Ongoing issues with CEST

It's no secret that the IR35 legislation can be difficult to navigate at the best of

times, as an IR35 determination is often subjective and dependent on the specific

circumstances of a contractor's engagement with a client.

HMRC's recent high-profile IR35 cases in the courts, such as Lorraine Kelly, have only

further highlighted the complexity of this area of legislation.

To assist relevant stakeholders, HMRC introduced a Check Employment Status for

Tax (CEST) tool that workers, engagers, and agencies can use to see whether HMRC

considers an engagement to fall within the scope of IR35.

As HMRC has stated that it will stand by the results given by CEST unless the

information provided isn't accurate, it is likely to be relied on by many organisations

when making a status determination.

However, CEST in its current form is flawed and does not consider fundamental

tests when determining employment status, including the Mutuality of Obligation

(M00). What's more, in a significant minority of cases CEST cannot even make an

employment status determination.

HMRC has stated that an improved CEST should be available for use later in 2019,

but, without seeing the new tool, it's hard to say whether it will be reliable enough

when assessing contracts impacted by the April 2020 changes.


The power to transfer PAYE liabilities

One of the more controversial aspects of the draft legislation is section 688AA,

which would, by means of secondary legislation, permit HMRC to recover PAYE

liabilities from other entities in the labour supply chain in cases of non-compliance.

This could create a situation where, even if a client or agency had taken all

reasonable steps to comply with the new rules, they could still face a PAYE liability

if non-compliance is found elsewhere in the chain.

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