How IR35 affects personal service companies from April 2021
The first week of April is always an important one for employers and the self-employed in the UK. With new legislation routinely being implemented at this time of year, in 2021 the most significant such change is the rollout of IR35.
Workers involved in off-payroll working for a client, through their own intermediary (often a personal service company; a PCS), are set to be defined as either inside or outside IR35 from the start of the month.
IR35 – what is it?
To answer this in full, we need to go all the way back to 2000, when it was first introduced to UK law, as the ‘Intermediaries Legislation’.
Originally, it was introduced as a response to what the UK government defined as ‘disguised employment’ and was related specifically to contract engagement.
Fast forward several years to April 2017, it was then applied to Public Sector contract engagements. At this time it was identified as ‘off-payroll rules’.
Now being rolled out in the private sector, from April 6 of this year – delayed by 12 months due to the impact of COVID-19 – IR35 tests the self-employed status of contractors.
From this date, a contractor will be deemed to be either be inside or outside IR35.
How is this decided?
Previously, the contractor themselves decided their self-employed status. Under IR35, this responsibility will instead pass to the end user client.
Based on each specific role, and individual business circumstances, the client is now required to make an employment status decision, and present this to either the contractor, recruitment agency involved in the contract, or both.
The government have provided a CEST (Check Employment Status for Tax) Tool, which can be used to determine whether a contractor should be inside or outside of the new legislation.
The tool, which can be found here, takes in the key elements of each case, and will usually provide an outcome for the client.
What happens then?
If, after the assessment, a contractor is deemed to be inside IR35 (essentially, they look like an employee), they will be subject to PAYE & NIC deductions, at source, from April 6.
At this point, the tax benefits of working via a PCS (Personal Service Company) will be lost immediately.
The contractor may then prefer to sign a Contract for Services, and be paid by and payrolled by the recruitment agency, or alternatively sign an employment contract with an umbrella company.
In either case though, the company paying the contractor becomes responsible for deducting income tax and national insurance contributions from their earnings.
What if I disagree with the decision?
Anybody who disagrees with the decision does have the right to appeal, and the client is then required to respond within 45 days. In the instance that the decision is upheld, the client will need to provide further explanation as to why this has happened.
Are there any exemptions from the new IR35 legislation?
If the paying company is defined as a ‘small company’, as per the Companies Act 2006, then the new legislation will not apply. For the time being, any employees carrying out assignments for small companies (as defined below), will continue as normal:
- A turnover of not more than £10.2m
- A balance sheet of no more than £5.1m
- 50 employees or less
What do I need to do now?
Clients should already be well-versed on the rollout of the new legislation and making decisions as to who is inside or outside IR35, and why.
Contractors, however, may wish to have a conversation with the people they work for, if a decision has not already been made on their IR35 status.
If you have any questions about the new legislation, and what it means for you, give us a call on 01325 285033.