For those unfamiliar with IR35, it can basically be described as a set of tax rules that were introduced into the UK in 2000. They ensure that individuals who work in a similar way to employees but provide their services through an “intermediary”, such as a personal service company (PSC), end up paying similar tax and national insurance contributions (NIC) as would be paid by an employee.
The key question to ask when determining if IR35 applies is whether the worker would have been a deemed employee of the end-user client but for the existence of the intermediary. Common examples of where this may be relevant to housing associations is through their use of contractors or consultants who provide their services through PSCs. Changes to IR35 are being introduced from 6 April 2021 (one year later than previously proposed), which are aimed at reducing non-compliance and making it easier for HMRC to monitor and enforce compliance.
The changes in April will affect medium and large private sector organisations. They are based on the existing public sector IR35 rules that were introduced in 2017. The rules will place the burden for assessing whether IR35 applies onto the end user of the worker’s services rather than the existing intermediary.
Where the end user determines that IR35 applies, the fee payer (which may be the end user, a recruitment agency or another third party which pays the intermediary) will become responsible for accounting for and paying the related tax and NIC (including employer NIC), to HMRC.
Such changes will not affect end users defined as a small business. For corporate end users, the rules propose defining a small business in the same way as the definition provided in the Companies Act 2006, which includes two or more of the following features:
Such changes will mean that medium and large businesses in the social housing sector that engage off-payroll workers who operate via intermediaries, such as PSCs, will have new obligations to consider. They will be responsible for determining if IR35 applies and issuing a formal status determination statement, notifying the party that they contract with and the off-payroll worker directly of their determination and the reasons why they have come to such conclusions.
Where it is determined that the rules do apply, the fee payer ultimately paying the intermediary will need to apply PAYE and make deductions including additional costs incurred, such as employers NIC and the Apprenticeship Levy. This reflects the position already in existence for public sector end users. When HMRC is unable to collect what is owed from the paying party, in certain situations it will be able to seek payment from the end-user.
HMRC’s Check Employment Status for Tax (CEST) is an online tool to assist with tax treatment and the application of IR35. There is no mandatory obligation to use it, but if the end-user enters the correct information into the tool and accurately updates it when required, HMRC should accept the results determined by CEST.
Medium and large organisations in the social housing sector (including those with charitable status) should prepare for the new rules now. They should initially determine which workers operating via off-payroll arrangements after 5 April 2021 may be caught by the IR35 rules and then put the correct processes in place to deal with this, including the issuing of status determination statements, the creation of a compliant status disagreement process and the withholding of tax where appropriate.
It should not be forgotten that where off-payroll workers are sourced through secondary intermediaries such as agencies, debt transfer provisions in cases of default may apply. Care should also be taken when entering into new agreements and when renewing existing contracts with workers or agencies due to the potential additional costs the changes in April will bring.