IR35 Guide for End Hirers

If you are an end client engaging Limited/PSC contractors you need to be aware of the changes coming in April 2021

Dec 10, 2020
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Very similar to what was seen in 2017 with the public sector, and what has seemed like years in the build-up, are the IR35/’Off-payroll’ reforms that are set to impact end hirers working in the private sector from April 2021.

The main change to get used to is that it will no longer be the contractor’s responsibility to determine whether their assignment is inside or outside IR35, and this will instead fall to the end client or hirer for all medium and large companies.

The changes have understandably brought a lot of confusion within the freelance/contracting industry for all parties within the supply chain. End hirers suddenly have a lot more to get used to, because where previously they could leave the compliance checks to other parties in the chain, they now have a great deal more responsibility. It’s not all doom and gloom however, and the changes also bring opportunity to review which  contractors are engaged as Limited Companies, if they are in the right pay model and to consider alternative compliant models.

Here is a guide to some of the main points to consider when engaging with your contingent workforce.

What’s changing?

From 6th April 2021, Limited Company or Personal Service Companies (PSC) contractors working in the private sector will no longer be in control of assessing their own IR35 status.

The ‘Off-payroll working’ or IR35 reforms, mean that HMRC is increasing the requirement to take ‘reasonable care’ (whatever that means) when assessing if roles are inside or outside of IR35. If HMRC believes that reasonable care has not been taken, then the ‘Status Determination Statement’ – a new requirement for the end hirer to produce, will not be valid and any unpaid tax liability will remain with the end hirer.

Unlike the public sector reforms, a small business exemption has been included. This means end hirers which meet the definition of a small company as per the companies act 2006 will not be impacted by the changes. Any contractors that are engaged by a small company will work the ‘old way’ and have responsibility for determining their own IR35 status.

Aa a small company, you need to meet two out of the three criteria below:

  • A turnover of no more than £10.2 million
  • A balance sheet total of less than £5.1 million
  • 50 employees or less

The Impact

End hirers will have a lot more compliance checks to consider in future if they are still wishing to engage with Limited/PSC contractors either directly or through a recruitment supplier. After April 2021, your responsibilities are as follows:

Assessing IR35 status

One of the key responsibilities for end hirers will be to indicate whether the worker is a genuine contractor (outside IR35) or an employee (inside). Below are some of the most commonly used criteria to determine IR35 status:

Control - how much control do you exercise over the contractor?

Right of Substitution - Are you engaging the Personal Service Company to complete the work or do you require the services of a specific individual

Mutuality of Obligation - Is there an ongoing obligation on you to continue to offer work and the contractor to accept it?

Status Determination Statements

This statement should confirm whether the contract falls inside or outside IR35 and the reasons why this decision has been made. This must then be passed to the contractor and the next intermediary in the supply chain e.g. recruitment agency, for you to comply with your responsibilities.

If the contractor or the ‘fee-payer’ e.g. when an agency pays the contractor, disagrees with the status determination statement, they can challenge this in writing. You have 45 days to respond with a revised statement or explain that your decisions stand and the reasons why this is the case.

Failure to respond within the 45-day time frame means that any unpaid tax liability sits with you.

Reasonable Care

When making status determinations, end hirers must exercise ‘reasonable care’. While the legislation makes this area a little ‘fuzzy’ in terms of what constitutes reasonable care, you must show that you have taken the contractor’s circumstances into account:

  1. Taking appropriate advice, from a legal professional or accountant
  2. A full assessment on an individual basis

The risk is that by not using reasonable care when assessing the status, you could be held liable for unpaid tax and National Insurance contributions on the contractor’s earnings.

Auditing the supply chain

Further responsibility for end hirer’s is to be assured that each party within the supply chain are compliant with their duties. As part of the legislation, HMRC are introducing debt transfer provisions which mean they can recover unpaid tax liability from other parties in the supply chain e.g. the end hirer, if they are unable to recover this from the fee-payer. This means that you could meet all your obligations under the legislation and still end up with an unexpected tax liability if the fee-payer fails to make the correct deductions.

HMRC have stated that they will only seek to use the debt transfer provisions where they believe a tax avoidance scheme has entered the supply chain, so it is important that you minimise the risks by regularly auditing your suppliers and also the payroll intermediaries that they engage with. Auditing your suppliers can keep you compliant, avoid risks to your reputation and will ensure that you are aware of how the contract chain is operating.

The Result

Although these new changes don’t mean the end of contractors being engaged through PSC’s per se, it will no doubt reduce the number of Limited Contractors that clients feel comfortable engaging with, especially in certain sectors.

‘Blanket decisions’ by companies, whilst not popular to some, will become commonplace and are very understandable due to the amount of new compliance and trust required throughout the contract chain. The end hirer will now have to work more closely with for example, an agency they recruit through, to assess the potential for Limited’s/PSC’s and/or help categorise where contractors should fall into other pay models.

The Solution

The effort required to get everything in place can be overwhelming, but we are here to help with compliant contractor options as an alternative to the rigorous process that now surrounds the engaging of PSC’s. It is not a crime to be despondent about doing the whole status determination and IR35 assessment process, there are other alternatives that can be just as useful for your contractors. These include - CIS/Non-CIS Sole Trader, Umbrella PAYE, Joint Employment, PEO Model.

Since 2008 we have specialised in various self-employed and PAYE payroll/HR related services for the contingent workforce. Please contact us to ask about your options at: compliance@orbitalservices.co.uk or fill out the form below and we will be in touch.

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