IR35: April 2021 changes to off-payroll workers

HMRC have confirmed that IR35 changes will be coming into effect from 6 April 2021 which is set to affect businesses, contractors and self-employed workers alike. Worryingly, recent research highlighted many organisations are not ready for the rollout.

The private sector reform was due to take place in April last year, but was delayed because of the Covid-19 pandemic.

IR35 is another name for the off-payroll working rules. It is designed to assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax.

Contractors who work through their limited company enjoy a level of tax efficiency.

Some contractors and their clients try to take advantage of this tax efficiency by working as if they are self-employed, when for all intents and purposes they are employees. HMRC has designed “the off-payroll working rules” to tackle this.

Some rules already apply to all public sector clients, but from 6 April 2021 medium and large-sized private sector clients also need to apply them. The private sector includes third sector organisations, such as some charities.

The rules apply to all public sector clients and private sector companies that meet 2 or more of the following conditions:

• you have an annual turnover of more than £10.2 million
• you have a balance sheet total of more than £5.1 million
• you have more than 50 employees

Balance sheet total means the total amounts shown as assets in the company’s balance sheet before deducting any liabilities.

The rules are designed to crack down on contractors who essentially operate in a similar way to employees but work through limited companies for tax purposes.

IR35 refers to the off-payroll working rules that aim to ensure that both contractors and the companies they are working for are paying the correct level of National Insurance contributions (NICs).

Under the reforms, medium and large private businesses will become responsible for judging whether their contractors fall inside or outside the scope of IR35, rather than the workers themselves.

From 6 April 2021, the obligation for the individual in the Personal Service Company (PSC) to make the assessment and deduct any PAYE/NIC will transfer from the PSC to the engaging entity or end client. Tech businesses that are engaging individuals through PSCs will need to assess each individual’s IR35 status.

It will also require companies to understand their supply chain as the rules require assessment of any individuals that are providing their services indirectly; for example, via a temporary employment agency and, potentially, some consultancy companies that provide individuals to tech companies. 

If a contractor provides services to a medium or large-sized private sector client, they:

There is no change to the rules for contractors providing services to small businesses in the private sector.

The changes are a way for the Treasury to make more money through National Insurance contributions.

Employees of a company must pay 12 per cent National Insurance on earnings between £9,500 and £50,000, and two per cent on earnings above this, with employers also contributing 13.8 per cent in payments above the £9,500 threshold for each employee on their payroll.

However, self-employed contractors pay class two NICs of £3.05 a week on earnings between £6,475 and £9,500, class four contributions of nine per cent up to £50,000, and two per cent on anything over this. This works out to a lower tax bill than if they were employees. Employers also do not have to pay contributions for self-employed workers.

The Government has said this will not affect people who work as genuine freelancers. Instead, it is targeted largely at contractors who set up a PSC and use that for their business.

HMRC believes a portion of these contractors should be regarded as employees, and therefore be paying the same amount of tax.

HMRC has stated that if the end engager does not take reasonable care in the assessment for the ‘Status Determination Statement’ (SDS), any underlying PAYE/NIC liabilities will remain with the end engager and there could also be penalties and interest.