IR35: Understanding the changes to off-payroll working

December 1, 2020

Caroline Vooght, director at Expion Search & Selection, focusses on the importance that both businesses and contractors understand the new rules around off-payroll working, also known as IR35, as recent changes come into effect next April

In 2000, HMRC introduced IR35 rules to assess whether a contractor is genuine rather than a ‘disguised’ employee to ensure they pay the correct amount of tax. In the past, the contractor determined this; however, under the new IR35 rules set to come into place in 2021, the employer will become accountable for all IR35 judgements. As businesses increase their use of interim contractors while navigating the impact that COVID has brought, it has never been more vital for organisations to understand the implications IR35 can have on finances.

You may be affected by IR35 if you are:

a worker who provides their services through their intermediary
a client who receives services from a worker through their intermediary
an agency providing workers’ services through their intermediary

Understanding the updates in IR35

From 6 April 2021, medium and large businesses will need to decide whether contractors who work through their own company fall inside or outside of IR35. If the contractor falls inside IR35, the business or the third party paying the contractor will need to deduct income tax and employee National Insurance (NI). The employer must decide using ‘reasonable care’ and share this, in addition to any reasoning behind the decision, to all parties in the supply chain.

Problematically, some organisations have decided to adopt a ‘blanket approach’ covering their entire company against the tax liabilities and national insurance costs. This doesn’t mean HR departments are deliberately providing inaccurate information but suggests there may be misunderstandings of how contractors operate.

HMRC has stated the blanket approach does not constitute ‘reasonable care’, and is bad practice. According to the new rules, all companies must demonstrate that they have assessed IR35 correctly and may be expected to take a higher degree of care if they are a larger company that has significant resources to contribute to compliance.

Employers must provide a comprehensive statement which declares a contractor’s deemed employment status following an IR35 assessment; a status determination statement (SDS). Determinations are dependent on several criteria, including control, The Right of Substitution and Mutuality of Obligation.

Control is determined on whether a contractor has the freedom to carry out the contract, using their expertise, as they see fit.
The Right of Substitution is the right for a contractor to send a replacement to perform services for the client on their behalf. Employers are not allowed to interview the replacement contractor and must accept the choice of the contractor.
Mutuality of Obligation states the contractor mustn’t do any other work for the business, and the company is not obliged to provide additional work outside the contract, nor on completion; this constitutes a contract of employment.

If the contractor is in charge of how their contract is completed, work according to their own schedule, allow a substitute contractor, and are prohibited from working with different businesses; this will leave them outside IR35.

Are the changes to IR35 likely to be delayed again?

As a recruiter, Expion Search and Selection is often asked whether the changes made to the off-payroll rules will go ahead, due to the previous delay to enable businesses deal with the economic impact of COVID-19. This seems extremely unlikely, with the changes being made law in July 2020. To delay the changes again, HMRC would have to apply to challenge the law which is extremely difficult and time-consuming.

What to do next?

Working with a recruitment agency can remove the risk of an HMRC challenge by assessing the status of the contractor based on the assignment, and if deemed to be outside IR35, provides insurance that covers the tax liability should there ever be a challenge from HMRC. This removes the risk to everyone in the supply chain, and would therefore give you immediate access to contractors if you need them.