With 6 April 2021 quickly approaching, the IR35 reforms are now back on the agenda and fast becoming a priority. Affected businesses need to have their implementation process in place before the IR35 reforms take effect.
IR35 is designed to ensure that appropriate income tax and national insurance contributions (NICs) are paid by contractors who provide their services through an intermediary company. In a nutshell, the IR35 rules bite where, but for that intermediary company, the individual contractor would be deemed an employee of the client. The IR35 reforms are important as they require medium and large businesses to carry out status determinations to assess whether IR35 applies. Where they conclude that IR35 applies (i.e. that there is deemed employment), the IR35 reforms shift responsibility to the client for making tax and NICs deductions through PAYE.
Status determinations must be carried out before the first payment date falling on or after 6 April 2021 (and periodically thereafter). Both the contractor and any relevant intermediary (e.g. the contractor’s personal services company or any recruitment business) should be given a statement of the determination and the reasons for it. There will also need to be a process in place for addressing any challenges to the decision. These steps are important – deemed employment is the default position where a status determination is not carried out with reasonable care, a status determination statement is not provided, or where a challenge is not dealt with. Although HMRC has said it will take a light-touch approach to enforcement in the first 12 months (provided there is no evidence of deliberate non-compliance), it can charge penalties for the non-payment or underpayment of tax as well as recovering what is due.
The IR35 reforms increase the cost and risk of using contractors for all medium and large businesses. A determination of deemed employment status means setting contractors up on payroll in order to make the necessary deductions. It also increases their costs as employer NICs and apprenticeship levy payments will become due. Businesses engaging contractors via intermediaries will therefore need to carefully consider their options and strategy for retaining contractor resource.