Following the introduction of IR35 reforms in the public sector in April 2017, it was widely speculated that the government would look to roll this out to the private sector. This was confirmed with the arrival of the draft legislation in July 2019.
So what’s changing?
While the employment status tests themselves haven’t changed, and will not change, the parties responsible for administering the rules have and new responsibilities have been introduced.
The April 2021* reforms will see medium and large private sector businesses in charge of determining IR35 status of an assignment. The tax liability will also transfer from the contractor to the fee-paying party (often the recruitment agency) in the supply chain.
We’ve outlined the key points mentioned in the draft legislation below.
‘Small’ companies exempt
For companies that HMRC deems as small, they will remain exempt from private sector reform. This means that contractors engaging with a small private sector company will still be required to set their own IR35 status.
HMRC deems a company as ‘small’ and therefore exempt from the IR35 reform if they meet two of the following criteria:
- Annual turnover doesn’t exceed £10.2m
- Balance sheet total doesn’t exceed £5.1m
- No more than 50 employees
In this situation, if you are the fee-paying agency placing contractor into ‘small’ companies, the contractor will continue to set their IR35 status and carry the liability.
Reform will not be retrospective
So for outside IR35 contractors deemed to be caught inside IR35 by the legislation from April 2021*, HMRC won’t look retrospectively at the assignment and pursue them or the fee-payer for employment taxes.
5% expenses allowance to be scrapped
As was the case in the public sector, the 5% expenses allowance - which HMRC currently allows contractors operating inside IR35 - will be removed. This allowance was initially introduced to help contractors cover the expenses of administering IR35 and calculating the ‘deemed payment.’ However, given the new responsibilities on the end-hirer to determine the IR35 status of the contract and the fee-payer to make deductions for tax and NI, the government has scrapped it.
Should the contractor work inside IR35 with a ‘small’ company in the private sector, this allowance will still apply.
Introduction of a Status Determination Statement (SDS)
When making IR35 decisions, private sector companies will be required to share their reasons for a particular determination with contractors and the first recruitment agency in the supply chain. This must then be passed down the chain until it reaches the ‘fee-payer’.
HMRC calls this a ‘Status Determination Statement’ (SDS) and has introduced it with the aim of increasing transparency with regards to assessments. Until the client shares this with the contractor and the fee-payer, they will carry the liability and therefore the risk.
The April 2021* reforms detail a requirement to use ‘reasonable care’ when making status determinations. Whilst the legislation does not define what constitutes reasonable care, it is safe to say that blanket determinations will not qualify. Failure to take reasonable care will invalidate the status determination statement and mean that the end hirer retains the tax liability.
Introduction of Client-led Disagreement Process
This will give contractors and fee-payers the chance to challenge what they believe to be inaccurate status decisions. Part of this includes the need for end-hirers to respond to this dispute within 45 days. If they fail to do this, they will take on the fee-payer responsibilities and therefore be liable for any unpaid tax and NICs.
Debt transfer provisions
IR35 reform introduces a new power for HMRC to collect PAYE that goes unpaid from other parties in the supply chain. This will apply to all contracts in the public sector and engagements with medium and large companies in the private sector from April 2021*.
This means that if the fee-payer fails to make deductions and pay the PAYE tax and NI liability, HMRC can recover the unpaid liability from other organisations in the supply chain.
This is particularly important if you’re the recruitment agency that engages directly with the end-hirer. HMRC’s view is that as a professional staffing organisation with full visibility of the supply chain, you are in the best position to drive compliance. And failure to do so, has consequences.
How can Parasol help?
There is no doubt that the above changes present significant challenges to recruitment agencies and the contracting industry as a whole. Parasol have 20 years’ experience in helping recruitment agencies manage legislative change, so if you’d like to improve your knowledge of the legislation get in touch with our Agency Support team on 01925 644 474.
*Update: at the time this article was written, the off-payroll (IR35) reforms were due to be implemented on the 6th April 2020. On the 17th March 2020, the UK government announced that it would be deferring the reforms to the 6th April 2021 to help businesses and individuals during the COVID-19 crisis.