There are now less than 48 days until 6 April 2021. From that date, all medium and large companies in the private sector will become responsible for assessing whether or not individuals working for them through personal service companies are properly inside or outside IR35 (the off payroll working rules). If they are inside IR35, such companies will now be responsible for deducting the necessary tax and national insurance contributions on payments made to those personal service companies. This shift in responsibility is a significant change in the law and the penalties for getting it wrong are potentially expensive in an ongoing relationship.
For companies caught by these provisions (i.e. those who meet two of the following three criteria: an annual turnover of more than £10.2 million, a balance sheet total of more than £5.1 million and more than 50 employees) they should be taking the following immediate steps to ensure compliance with this new legislation which will apply to any payments made to made after 6 April 2021:
- Review all contractors they engage (directly or indirectly) through an intermediary personal service company.
- Determine their true employment status. This can be done using HMRC’s CEST tool. The advantage of using this tool is that provided it is used in accordance with HMRC guidance and the information provided is and remains accurate, then HMRC will stand by the status determination result given by the tool. This is currently the only form of determination which provides certainty that the tax treatment will not be challenged by HMRC.
- Once a CEST determination is obtained (that either IR35 does not apply or that IR35 does apply or that that the individual is self-employed for tax purposes or employed for tax purposes) the company needs to take further steps. If the determination is that IR35 does apply, the company needs to provide that status determination statement to the individual worker specifying whether IR35 applies or not and providing reasons for the conclusion. The worker has the right to challenge the status determination. The company must respond to any appeal by a worker against the status determination within 45 days. Time is now short to undertake this process before 6 April 2021 so urgent steps should be taken.
If IR35 does apply then the new rules apply to payments made on or after 6 April 2021. From that date the company will be responsible for deducting tax and national insurance contributions from any payments made to the personal service company. The penalties for non-compliance are potentially significant and could include: interest on unpaid tax and penalties for failure to deduct tax of up to 100% of the potential lost revenue for deliberate and concealed inaccuracies; 70% penalty for intentionally submitting an incorrect document or 30% penalty for failing to take reasonable care.
Where determinations indicate that IR35 does apply, companies do have options: they will either have to start deducting tax as outlined above or examine the alternatives available which can include engaging the worker as an employee, making genuine changes to working practices, outsource the service or engage the worker as a genuinely self-employed individual or through an agency or umbrella company (with no personal service company in the chain). Some of these options will inevitably involve additional costs for the employer company and changes to contractual arrangements.
We are happy to discuss the options available, advise on documentation and be a guide through the maze to any companies needing help in determining the best way forward in this situation. For an initial discussion, please contact Ruth Hickling or any member of the Edwin Coe Employment team.
If you aren’t receiving our legal updates directly to your mailbox, please sign up now
Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
Edwin Coe LLP is a Limited Liability Partnership, registered in England & Wales (No.OC326366). The Firm is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office address: 2 Stone Buildings, Lincoln’s Inn, London, WC2A 3TH. “Partner” denotes a member of the LLP or an employee or consultant with the equivalent standing.