The UK’s IR35 legislation ensures that contractors pay the same tax and National Insurance contributions as an equivalent employee. The 2021 reform will bring private sector IR35 in line with the public sector, where the reform was implemented in 2017.
Currently the responsibility for determining status sits with the contractors or Personal Service Companies (PSC); the new IR35 changes coming into effect on 6th April 2021 will shift the responsibility to medium and large companies to carry out the assessment for IR35 status.
Our aim is to provide a simple guide for contractors explaining the IR35 changes, how contractors will be affected, how to avoid IR35 non-compliance, and how DASA Umbrella Limited are managing the IR35 reform. This guidance is provided as general information and in no way should be taken as legal standing on IR35 compliance, you should seek out independent advice if you are unsure or require further clarification.
IR35 rules were originally introduced in the UK in 2000, with the intention of ensuring that individuals who are working like employees but who operate via an intermediary, such as a PSC, pay broadly the same tax and National Insurance Contributions (NIC) as an employee. With the PSC deciding whether the rules apply via ‘self-assessment’, HMRC believe there is widespread non-compliance. HMRC have tried to remedy this by providing clarification with the new IR35 rules allowing them to effectively tackle any such non-compliance.
HMRC have now clarified the changes to the Off-payroll Working Rules which will now apply only to payments made for services provided on or after 6th April 2020 and NOT services provided prior to this date, but where receipt of payment has been delayed and only received on 6th April 2020 or thereafter. This removes any ambiguity in relation to when invoices are raised/ issued compared to when the services where actually performed.
The new Off-payroll Working Rules will only affect medium and large private sector organisations, so “small” end clients are set to be exempt. The classification for medium and large companies is based on the Companies Act 2006 definitions. Under current legislation this is broadly a business that has two or more of the following features:
- a turnover of more than £10.2m
- a balance sheet total of more than £5.1m
- 50 employees or more
All businesses now have a statutory obligation to confirm whether or not they are “small”. The new rules will only apply to medium and large businesses in the private sector who are the end user of the worker’s services and to the fee payer, if different, such as fee payers in the recruitment sector. The Government have indicated that they intend to use “similar criteria” to that found in the Companies Act 2006 to define a medium-large business as set out above.
If our clients are deemed to be medium-large businesses, they therefore will be responsible for carrying out an assessment to determine whether Limited Company contractors’ roles are inside or outside IR35 legislation. If your role is deemed to be inside legislation, you will be subject to PAYE and NICs deductions.
The reform will place the responsibility onto the end user (our clients) of the worker’s (our contractors) services, for all payments by medium and large businesses from 6th April 2021. Where it is concluded by the end client that IR35 applies, the fee payer (in this case DASA Umbrella Limited) will become responsible for accounting for and paying the related tax and NIC, including the additional cost of employer’s NIC, to HMRC.
Where an umbrella company employs a contractor as a worker directly, the Off-payroll Working Rules do not apply. It will be our clients’ responsibility to determine whether the Off-payroll Working Rules apply, i.e. is this assignment “inside IR35”? Reference to the HMRC guidance and the employment status for tax (CEST) tool should be consulted.
The off-payroll rules apply to the following scenario:
- as a worker you provide services to a client through an intermediary (your personal service company (PSC)) but would be classed as an employee if you were contracted directly with the client.
- Before 6th April 2021 it Is your limited company’s responsibility to decide your own employment status for each assignment.
The Off-payroll Rules do not apply to wholly overseas organisations with no UK presence, as these are excluded from having to consider the off-payroll working rules. However, the obligation to determine tax status in these instances remains the contractor’s responsibility.
Where HMRC disagrees with the determination made, it can investigate and insist on retrospective payment of tax, as well as fines for late payment from the fee-payer, and the client will be liable for the unpaid taxes.
The Off-payroll Working Rules will still apply irrespective of how many clients and assignments a contractor is working on. There is the argument that if you are working on multiple projects for various clients, this will demonstrate that you are in business on your own account as an independent contractor, and therefore fall “outside IR35”. However, your IR35 status is assessed on an assignment basis, working for multiple clients is not a significant indicator of being in business on your own account; the IR35 status for each assignment is judged on its own merit.
If the client determines that an assignment is “inside IR35”, several options are available to you in terms of an alternative to an off-payroll model. The options are:
- Inside IR35 PSC Deemed Employment Deductions
Should an individual wish to continue to engage as a contractor via their PSC who is deemed “inside IR35”, DASA will calculate a “deemed employment payment. This ensures compliant deductions and reporting through HMRC payroll system. The deemed employment pay rate is Income after deductions, including both employee and employer NICs and the Apprenticeship Levy (only where relevant). - Individual ‘Worker’ Fixed Term Contract for Services
DASA may contract directly with the individual (not PSC) with deemed employment deductions, fixed end date and rates inclusive of holiday pay (no other employee benefits owed). - Umbrella Company Employment
Where an umbrella company employs a contractor as a worker directly, the Off-payroll Working Rules do not apply. We are able to provide FCSA regulated Umbrella services. Our Umbrella weekly fees apply; however, these also include insurance cover and other benefits.
For more information regarding IR35 legislation and how it might affect you, please do not hesitate to contact us directly on 0207 118 0555 or via info@dasa-umbrella.co.uk.