IR35 has become a ‘hot topic’ in recent years, but in fact it has existed for over two decades. Originally introduced by the HMRC in April 2000, IR35 (which takes its name from the original press released published by the then Inland Revenue) sought to minimise any potential tax avoidance among contractors and temporary workers providing their services as ‘Personal Service Company’. However, the original ruling left it up to the contractor to determine exactly where – and to what degree – he or she fell within the guidelines. Needless to say, this did not support the compliance that the HMRC was hoping for!
So what’s new for 2021?
Recent enhancements have tightened up IR35 guidelines, and it’s now clearer as to what does and does not constitute an “Off Payroll” working arrangement. From April 2021, the onus will be squarely on the employer: it will be their responsibility to ensure that each and every contractor engagement is accurately assessed to decide if the role falls inside or outside the HMRC’s rules.
Recently, the HMRC introduced a self-check CEST tool to help contractors determine where in the rulings they fitted. Straightforward in theory – unfortunately, less so in practice, with many unclear or “no result” outcomes being delivered. This does leave responsible firms – and contractors – in something of a limbo area. With the April 2021 Tax year change coming up and the new rules coming into force, current contractors and the roles they hold will need to be assessed – not only to determine whether the role falls inside or outside of IR35, but also how critical the role is. In other words, moving ahead it will be the role that determines the contractors’ IR35 status – not the other way around.
Needless to say, numerous questions remain. Will contractors need to be given an enhanced pay rate for it to be viable after April 2021? Add in contractors working abroad (or through limited companies registered abroad), and the complexity of the decisions intensifies. A rough calculation recently published about the effect on the average contractor of the new rules reveals that around 20% of individual earnings may be lost through taxation.
The role of HR
Thankfully, many contracts can still legitimately fall outside the rules (over 500,000 of the first million uses of the HMRC CEST tool suggested that this was the case). That said, it is vital that the rules are not bent to make it fit, in a way that may be harder to justify further down the road. Departments desperate to keep existing contractors on an uninterrupted relationship basis will no doubt place considerable pressure on HR departments to help get things right. Proper advice on how to achieve the right outcome – from a compliance and a cost perspective – is something that many companies will need help with. Contracts written for roles outside IR35 must support the determination made, and not accidentally undermine the decision. And when a role is found to fall within the IR35 rules, it will be vitally important to correctly identify the most appropriate type of contract to use – be that worker, zero hours, employment, freelance, fixed term, or statement of work. Systems will need to be in place to carry detailed records of decisions made to refer to later if HMRC investigate and the way that firms see and engage with contractors will likely change as a result.
What are your thoughts and observations on the new IR35 legislation? Why not share your own thoughts and observations. And, if you’re struggling to navigate your way through the IR35 legislation, please get in touch – it would be great to talk.
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By Debbie Scola | Director, Cerulean & HR Lead, smart/tasking