IR35 regulations – the complex tax legislation intended to prevent contractors working as ‘disguised employees’ – are changing, and unfortunately getting more confusing. From April 2021, responsibility for determining the tax status of a contractor will fall squarely on the shoulders of the client organisation. So how does the new IR35 work? And what does it mean for contractors and employing organisations?
What IR35 was
Originally, IR35 was intended to ensure that the tax revenue for a contractor was broadly the same as that for an employee, as long-term contracts could effectively absolve companies from the NI contributions required for a full-time employee, as well as sidestepping the cost of holiday and sick pay.
Contractors would deliver their services via a ‘personal service company’ (PSC). It was then the responsibility of the PSC to determine whether a contractor was a de facto employee – and to pay the tax to HMRC if necessary.
So what’s changed?
The big change to IR35 legislation is that responsibility for working out whether or not a contractor is in effect a full-time employee now lies with the client organisation/employer rather than with the contractor/PSC.
This has been in effect since 2017 for public sector organisations but is set to be extended to the private sector from April 2021. This will only be the case for medium-sized and large companies who are end-users of these contractors, however. Companies with fewer than 50 employees, a turnover of less than £10.2 million and a balance sheet under £5.1 million, will not have to bear the responsibility of assessing whether a contractor is a so-called 'off-payroll worker’.
How you determine the status of a contractor
There are three main things to consider if you want to work out whether a contractor should be considered as an off-payroll worker or whether they can fall outside the bounds of IR35: control, substitution, and mutuality of obligation.
Essentially, if a supplier of a service controls how they deliver that service, you would not be able to classify them as an employee.
This is about who performs the service you have contracted – if the contractor or PSC could theoretically substitute a number of different personnel to deliver the services contracted for, then they would not be considered an employee.
Mutuality of obligation:
This is a potentially complex issue, but essentially it boils down to this: if the end-user is not obliged to continue with the ongoing services offered by a contractor, and a contractor is not obliged to offer them, then there is no mutuality of obligation and thus the contractor would not be an employee.
Tools for determining employment status.
Of course, the reality is that the status of a worker’s or contractor’s employment is often a complex and nuanced issue. As a result, the HMRC developed an online tool for helping out: the Check Employment Status for Tax (CEST). Unfortunately, CEST has been widely criticised for falling short of the government’s own digital service standards, making assessments based on just 16 questions and not taking mutuality of obligation into consideration.
Fortunately, at Approach Personnel, we have (collaborated with a team of experts) to develop our own status determination tool that’s far more accurate and covers the contractor, the end-user and Approach Personnel as the service provider.
Approach Personnel can help steer you through this often-confusing legislation – and we can often provide genuine out-of-IR35 contractors. Contact us today to find out more