In November Chancellor Jeremy Hunt u-turned on the previous chancellor’s commitment to repeal the 2017 and 2021 reforms to the IR35 off-payroll working rules, which had made the entity that pays the contractor responsible for determining IR35 status. However, there is a growing consensus among a small group of Conservative MPs that a review of the IR35 rules is required, and very soon.
Given the current economic climate and a general election this year or next, can the chancellor’s arm be twisted to bring about a review of the rules in next month’s Budget? How might changes impact public and private organisations and those who work for them?
130,000 workers are likely to have been affected by the April 2021 off-payroll reform
HMRC recently produced a report on the short-term effects of the 2017/21 IR35 reforms on the private and voluntary sectors. In the report, HMRC estimates that 130,000 workers are likely to have been affected by the April 2021 off-payroll reform, and that the reforms generated an estimated additional £1.8bn in tax and other revenue between October 2019 and March 2022.
Confusion
IR35 compliance is a minefield for many clients. The grey areas cause confusion for both employers and workers, and there are penalties for getting it wrong.
Helping your clients to understand their responsibility when it comes to determining the IR35 status of a worker and the grey areas they need to watch out for is important. But before you start to determine IR35 status, you need to have certain pieces of information (see panel).
Essential information
To determine IR35 status, you will need to know:
- the contract details
- the contractor’s or worker’s responsibilities
- who has control over what work has to be carried out
- who has control over when or where the work can be carried out
- how the contractor/worker will be paid
- whether any expenses will be reimbursed or benefits provided
- whether the contractor has the right to send a substitute to do the work on their behalf
- whether there is an obligation for work to be provided and carried out
- if something goes wrong, how this would be put right and who is financially liable
- whether any equipment is provided so the work can be undertaken.
Tools to help
To help accountants and their clients, HMRC created the Check Employment Status for Tax (CEST) tool, which allows hirers, agencies and contractors that work through limited companies, partnerships or unincorporated associations to check whether the IR35 rules (which treat the workers who fall within them as ‘disguised employees’) apply to the freelancers they use.
It is important to answer the questions asked by the tool accurately. If you do so, HMRC will stand by any CEST decision made. Remember, though: if there is a change to the contract, the process will need to be completed again. Once it has been completed, make sure you keep a copy of the outcome for your records. The contractor/worker can appeal this decision directly with HMRC if they disagree with it.
Once IR35 status has been determined in this way, any freelancer deemed to fall within the IR35 rules can be added to the employer’s payroll, and the appropriate tax and national insurance contributions deducted.
Things to note
The IR35 rules apply on a contract basis, so a check needs to be made for any new contracts. A client may have multiple contracts with the same worker, some of which fall within the IR35 rules and some of which don’t. If the IR35 rules do apply, the contractor will be classed as a deemed employee. Any part of an invoice that relates to work is subject to tax and class 1 National Insurance contributions. The date a payment is made determines the tax period.
The deemed employer is not obliged to offer membership of a pension scheme, and does not need to apply auto-enrolment. Nor are deemed employees entitled to holiday, sickness or parental payments, and student/postgraduate loan deductions should not be made.
Contractors falling with IR35 as disguised employees may rethink how they provide their services
The employer’s National Insurance is not included in the calculations for employment allowance, and apprenticeship levy calculations should be applied for deemed employees.
When a deemed employee finishes their stint, they should receive a P45. Deemed employees should also receive a P60 if still employed by the end of the tax year.
Future position
In terms of the current legislation, the process probably won’t be simplified. The administration burden will still lie with the hiring organisation, and they need to keep evidence as such.
In the current economic climate, every penny counts for UK businesses and workers. Contractors caught within the IR35 rules as disguised employees may rethink how they provide their services, and there may be an increase in the number of small companies created that could qualify for exemption from the rules.
Although the chancellor’s Budget in March may bring good news, IR35 is here to stay for now.
