The IR35 reforms are set to impact end hirers working in the private sector. From April 2021, it will no longer be the contractor’s responsibility to determine whether their assignment is inside or outside IR35, and this will instead fall to the end client or hirer for all medium and large organisations.
The impending reforms have understandably brought a lot of unease within the industry for all parties within the supply chain. But for end hirers, this means a great deal more responsibility. If you’ve yet to prepare or you’re looking for an overview of what’s expected, our guide is here to help.
IR35 in the private sector: what’s changing?
From 6th April 2021, contractors working in the private sector will no longer be in control of assessing their own IR35 status.
As part of the IR35 reforms, HMRC is increasing the requirement to take reasonable care when assessing if roles are inside or outside of IR35. If HMRC believes that reasonable care has not been taken then the Status Determination Statement will not be valid and therefore any unpaid tax liability will remain with the end hirer.
Unlike the public sector reforms, a small business exemption has been included. This means end hirers which meet the definition of a small company as per the companies act 2006 will not be impacted by the changes. Any contractors that are engaged by a small company will retain the responsibility for determining their own IR35 status.
In order to qualify as a small company, you need to meet two out of the three criteria below:
- A turnover of no more than £10.2 million
- A balance sheet total of less than £5.1 million
- 50 employees or less
What impact will the IR35 private sector reforms have on end hirers?
The private sector reforms will see a lot of responsibility shift to the end hirer. After April 2021, your responsibilities are as follows:
Assessing IR35 status
One of the key responsibilities for end hirers will be to indicate whether the worker is a genuine contractor (outside IR35) or should be treated as an employee (inside). Below are some of the most commonly used criteria to determine IR35 status:
Control - how much control do you exercise over the contractor?
Right of Substitution – Are you engaging the Personal Service Company to complete the work or do you require the services of a specific individual
Mutuality of Obligation - Is there an ongoing obligation on you to continue to offer work and the contractor to accept it?
Using reasonable care
When making status determinations, end hirers must exercise ‘reasonable care’. While there is no definition included with the legislation of what actually constitutes reasonable care, the following is generally accepted that in order to show reasonable care, you must show that you have taken the contractor’s circumstances into account:
- Taking appropriate advice, from a legal professional or accountant
- Making a full assessment on an individual basis
If you don’t use reasonable care when assessing IR35 status, you run the risk of being held liable for unpaid income tax and National Insurance contributions.
Completing status determination statements
This statement should confirm whether the contract falls inside or outside IR35 and the reasons why this decision has been made. This must then be passed to the contractor and the next agency in the supply chain for you to fulfil your obligations.
What if the contractor disagrees with your determination?
If the contractor or the fee payer disagrees with the status determination statement, they are able to challenge this in writing. You have 45 days to respond with a revised Status Determination Statement or explain that your decisions stands and the reasons why this is the case.
Failure to respond within the 45 day time frame means that any unpaid tax liability sits with you.
The importance of regular auditing
For end hirers, it is important to ensure that not only their own responsibilities are being met, but that each party down the supply chain is fulfilling their responsibilities. As part of the changing legislation, HMRC are introducing debt transfer provisions to recover any unpaid tax liability from other parties in the supply chain, including ultimately the end hirer, if they are unable to recover this from the fee payer within a reasonable period. This means that you could meet all of your obligations under the legislation and still end up with an unexpected tax liability if the fee payer fails to make the correct deductions.
HMRC have stated that they will only seek to use the debt transfer provisions where they believe a tax avoidance scheme has entered the supply chain. It is therefore essential that you minimise the risk of this happening by regularly auditing your suppliers and the umbrella companies that they engage with. Auditing your suppliers can save you money, will avoid any risks to your reputation and will ensure that they are complying with your standards.
Preparing for the IR35 reforms as an end hirer
Getting up to speed with your new responsibilities can be overwhelming, but help is at hand. Since 2000, we’ve helped to bring countless clients up to speed with new legislation and to ensure they’re always acting compliantly. Another way we’re here to help is with the introduction of our new Business Impact Tool.
If you’ve not already prepared for the reforms, try our Business Impact Tool, Using the tool will take away the guesswork, as you can calculate the cost implications of the reforms for every party across the supply chain.