IR35 refers to tax legislation introduced in the year 2000 to tackle tax avoidance by workers supplying their personal services to their clients through an intermediary e.g. their own limited company, but who would be considered an employee if the intermediary was not used.
HMRC consider this to be “disguised employment” i.e. a self-employed worker who fills a permanent position in a company but doesn’t pay the appropriate Income Tax and National Insurance.
Since its introduction, it has been the responsibility of the Personal Service Company to determine the employment and tax status of the worker.
So why are reforms being introduced in April 2021?
HMRC consider “Loss” of taxation (IR35 non-compliance) to the Exchequer will be £1.3 billion pa in the Private Sector by 2023/24.
They estimate there are approximately 650,000 limited company (PSC) contractors in the UK and that 1/3rd of these PSCs should fall inside IR35 and be taxed as employees. HMRC further believe that only 10% of that 1/3rd are actually taxed correctly.
It is important to note that this also means that HMRC believes that 2/3 of PSCs are correctly outside IR35.
However, over the last twenty years, HMRC has not had the investigation resources to ensure PSCs are operating compliantly as there are too many small businesses to attack one at a time.
These reforms to IR35 also known as Off-Payroll reforms now enable HMRC to more easily investigate non-compliance, and also make it easier for them to recover underpayments of tax and National Insurance by changing the entity responsible for determining the employment and tax status from the PSC to the end client or hirer.
Are there any other changes?
As well as HMRC transferring the responsibility for determining the assessment of employment and tax status to the end client or hirer they have also transferred the liability for any underpayments of tax or National Insurance to the fee payer, i.e. the business making the payments to the PSC. This could be the end client but it could also often be a recruitment business.
These changes have already been implemented in the public sector in 2017 and the Government considered those reforms to have been a success. IR35 or Off-Payroll reform is therefore being rolled out to the private sector from April 2021.
These changes have now received Royal Assent so we can be sure they will be introduced.
From 6th April 2021 for any payments made after this date the hirer will be required to produce a Status Determination Statement (SDS) in which the hirer must:
- Advise on the employment status for tax
- Detail reasons as to how the decisions were made
- Communicate the result to the agency and worker
- Prepare each SDS with ‘Reasonable Care’
Wishing you all the best with your next contracting role.