An extension to the off-payroll rules (or IR35) came into place on Tuesday. These changes apply to any contractor or organisation that commonly engages contractors. Is your organisation up to speed?
08 April 2021
These rules already apply to contractor engagements with the public sector, but now apply to medium and large private companies. These are companies that tick 2 of following 3 boxes:
The changes have been designed by the government to crack down on what HMRC deem to be a form of tax avoidance. They believe that many organisations are engaging contractors, who work through an intermediary company, to effectively work as employees. The result is that the contractor will be paid a dividend through the intermediary company and HMRC misses out on the employee income tax and national insurance contributions that would normally be paid through PAYE. In fairness to HMRC, they are probably not wrong in a number of instances, particularly as the definitions of employee and workers continue to widen.
Previously it was up to the intermediary company (effectively the contractor) to decide if they were self-employed or not. The intermediary company has a tax incentive to declare themselves to be self-employed. As of the 6 April 2021, the onus is now on the organisation receiving the service (the “client”) to decide. They have less of an incentive to manipulate the facts of the working relationship, although the client will still be keen to avoid its contractors obtaining employment rights if possible. With every engagement, the client must provide a “Status Determination Statement”, confirming to the contractor whether they fall inside or outside the IR35 rules. This statement will be accompanied by a “Check Employment Status for Tax (“CEST”) test carried out through the government website.
Employment status, as proven by the requirement of a judgment from the Supreme Court in the recent Uber case, is currently a difficult grey area. It requires an analysis of the individual facts in any case. In its early stages, the CEST tests were met with criticism for being too black and white. It should however be pointed out that of the 24 tax tribunal decisions on IR35 last year, the CEST test would have been correct in 22 of them. With HMRC placing a heavy reliance on these tests, it is anticipated that their functionality and accuracy will continue to improve, however with the laws on employment status as they currently are, it will be impossible for an easy to use test to guarantee how a particular relationship will be interpreted by the tribunals. Parties, in turn, will likely also learn ways to manipulate the test results, which may or may not be reflective of the real life situation.
It will be interesting to see how closely HMRC monitor any arrangements deemed to be outwith IR35. In the initial period, we suspect that clients will err on the side of caution, and the number of contractor engagements to reduce significantly.
Whether the CEST tests are likely to be accurate or not, the employment team at Balfour+Manson handle queries on employment status regularly, and have seen first hand the factors taken into consideration by employment tribunal judges. As mentioned, the IR35 rules kick in when a tax tribunal judge considers the actual arrangement between the contractor and end client to be one of employment. The intention of the contractual relationship will always be one factor for consideration, but a judge will be required to look beyond this. Here is a non-exhaustive list of reminders of the types of things a judge will be looking at to decide if IR35 should apply or not:
At the moment, employment status is not a walk in the park, and it has large implications on tax and employment rights. If you have any concerns about your, or your contractors, status, then please contact the team at Balfour+Manson.