In the light of the various business challenges posed by the ongoing COVID-19 pandemic, it would be understandable if the incoming changes to the off payroll working rules ('IR35') have not been a primary focus for some businesses. By way of reminder, the new rules are due to take effect on 6 April 2021 (12 months after the original implementation date). Despite the ongoing pandemic, there is no indication from the Government that there will be a further delay in implementation.
With effect from 6 April 2021, medium- or large-sized businesses (so called ‘end-users’) will be responsible for determining the employment status of individuals who provide services to them through intermediary vehicles such as personal service companies. This reverses the current position where such obligation sits with the intermediary vehicle itself. Broadly, if the revised IR35 rules apply, end-users (and, in some cases, agencies through which they engage individuals) will need to pay those intermediary vehicles through payroll with appropriate deductions for PAYE and NICs.
Medium- and large-sized organisations
The new rules will apply to UK-based businesses or overseas businesses with a UK permanent establishment which are classified as medium- or large-sized organisations. Whilst HMRC has issued guidance on this issue, in principle a corporate entity will be medium- or large-sized if it meets at least two of the following criteria for two consecutive financial years:
- A turnover of more than £10.2 million;
- A balance sheet total (assets) of more than £5.1 million; or
- An average of more than 50 employees.
Similarly, a corporate entity will cease to be medium- or large-sized if it no longer meets at least two of the above criteria for two consecutive financial years.
Summary of new rules
In summary, the revised IR35 rules will require end-users within scope of the revised IR35 rules to:
- Make a decision as to whether the individual supplying services to it would have been its employee had the individual contracted directly with the end-user (as opposed to via an intermediary). End-users must exercise reasonable care in arriving at this decision;
- Prepare a 'status determination' statement setting out its employment status decision and reasoning and provide it to the intermediary with whom it contracted for the services of the individual. Failure to provide a status determination statement could lead to the end-user being liable for PAYE and NICs in respect of payments made to the intermediary;
- Put in place a 'status disagreement process' to deal with situations in which the individual or intermediary disagrees with its decision, and to comply with that process by re-confirming or changing its original decision and communicating that along with its reasoning to the other party within 45 days of a disagreement; and
- Deduct PAYE and NICs from payments it makes to the intermediary if the revised IR35 rules apply.
In order to prepare for these upcoming changes, if they have not done so already, organisations should:
- Confirm if they are in scope of the revised IR35 rules by ascertaining whether they would be considered a medium or large organisation for the purposes of the rules;
- Identify any current arrangements by which individuals provide services through intermediary vehicles and determine whether, but for the intermediary, the individual would be an employee. This will involve considering the tax and employment law factors that indicate employment. HMRC will expect businesses to use reasonable care when carrying out status determinations. Reasonableness will depend on multiple factors, such as the size of the business and the processes that the business has in place for carrying out status determinations. HMRC has updated its 'Check Employment Status' ('CEST') tool, which is one way for businesses to make a determination about whether or not an individual operating through an intermediary falls within the scope of IR35. However, this tool only reflects HMRC’s thoughts and opinions on the applicable law;
- Review payroll systems to ensure that there is capacity to apply PAYE and NICs to payments made to intermediaries where necessary and factor such additional expenses into financial data;
- Ensure that systems are in place to comply with the requirement to produce a 'status determination statement';
- Ensure that a dispute resolution mechanism is in place to deal with any disputes regarding status determination statements; and
- Consider any additional changes which need to be made as a result of their review of the status of individual service providers from an employment law perspective.