IR35 changes: Have you got it right?

IR35 legislation tackles ‘disguised employment’ where an individual worker provides their services through an intermediary (such as a personal service company) but works more like an ‘employee’ for the end-user client. IR35 looks at the hypothetical contract between the individual and end-user client and will apply if that contract is, in law, an employment contract.

The purpose of this legislation is to deal with tax avoidance by individuals who pay National Insurance Contributions (“NICs”), dividends and corporate tax of their intermediary, rather than employee income tax and NICs which are higher.

How has IR35 changed?

On April 6 2021, the new IR35 rules applied to companies engaging individual workers through intermediaries in the private sector.

The onus was put on the paying party (the employer) to determine if IR35 applies and, if the worker is deemed to be an employee, to make statutory deductions to the payment for their services, including income tax under PAYE and NICs. The paying party must report any tax deductions to the HMRC through ‘Real Time Information’ and also apply the apprenticeship levy where relevant.

The new rules apply to all private sector companies that meet two or more of the following conditions:

• have an annual turnover of more than £10.2 million
• have a balance sheet total of more than £5.1 million
• have more than 50 employees.

Status Determination Statement

In determining if IR35 legislation applies the end-user client will be required to decide the employment status of the individual worker. The end-user client must not make blanket assessments and evaluate each worker on an individual basis using reasonable care in arriving at its decision.

When assessing the IR35 status of the individual worker the new IR35 rules state that the end-user client must create a Status Determination Statement (“SDS”). A SDS is a document that declares the status of the worker and demonstrates how the end-user client reached its decision.

A SDS must be passed to each individual worker and, if relevant, every party in the supply chain until it reaches the paying party (for example, a recruitment agency) so they can make the necessary tax deductions.

If the end-user client fails to provide a comprehensive SDS to the necessary parties, or does not use reasonable care in carrying out its assessment, they will be responsible for paying the individual worker’s income tax and NICs whether or not they are the paying party.

Individual workers are entitled to challenge the SDS so the end-user client should have a process in place for dealing with disagreements. End-user clients must also keep detailed records and evidence of the process they followed to determine status and, if requested to do so, answer any questions about how the determination was reached.

If an individual worker challenges their employment status the end-user client has 45 days from receiving the challenge to respond. If the end-user fails to reply within this time limit they will become liable to pay the individual worker’s tax obligations.

Employee vs self-employed worker

In determining whether or not an individual worker is an employee or self-employed worker the law will look at the reality of the situation as well as the terms of the actual contract between the parties and consider the following:

1. mutuality of obligation
2. control
3. requirement to perform work personally (no right of substitution)
4. whether the individual can be said to be in business on their own account.

A number of recent high-profile cases have looked at the issue of employee vs self-employed worker:

• Lorraine Kelly successfully maintained that she was self-employed for the reason that ITV had very little control over how she presented her show.
• Christa Ackroyd was issued a £420,000 tax bill after the Tribunal considered her to be an employee of the BBC after it was proven that they controlled how she presented her programme.
• Helen Fospero, who was engaged by ITV through her limited company, was not considered to be an employee as she was under no obligation to accept any undertaking, which meant that there was no ‘guarantee of work’ and therefore no mutuality of obligation.

We Can Help You

HMRC have confirmed that in the first year of the changes to the IR35 rules they will not issue fines if an employer has taken reasonable care in making a status determination but made a mistake in its determination. If you are the end-user client and have not yet made all your status determinations, would like a review of determinations already made, or need assistance in dealing with any challenges to status determinations, we can help you.

If you are an individual who provides your services through an intermediary and would like a review of or wish to challenge a status determination, we can help you.

Please get in touch with our specialist Employment Law team through this website or by calling 0330 404 0778.