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IR35 rules: Status, responsibilities, and repercussions
The changes to the IR35 rules, set to be implemented on 6th April 2021, are significant to both contractors and end user clients. It has never been more important to know where you or your contractors fit within the new rules.
It is important to be aware of the rules and how they can affect the way you work or the way you treat your workers. So, what are the new IR35 rules, and who is responsible for enforcing them?
New IR35 rules
IR35 has been enforced for almost 20 years, but there are going to be significant changes to the legislation. Here are the new IR35 rules to consider when recruiting or searching for contract workers or positions.
The IR35 legislation is going to be extended to the Private Sector from 6th April 2021, where it only affected the public sector previously.
From 2021, the liability for assessing IR35 status for tax purposes is no longer solely on the contractor’s intermediary but the end business organisation.
Small organisations will be exempt.
HMRC will provide support and guidance to help businesses implement the rules and ensure the guidance is appropriate to the larger and more diverse private sector. For guidance, read more here.
Responsibility will now sit equally with the contractor and the end user client. So, this means that any unpaid tax can be collected from both parties if there has been an error made.
Organisations will only need to determine whether the rules apply for contracts they plan to continue beyond 6 April 2021.
If a contractor is suspected to be inside IR35 when they have claimed they are outside IR35, then they should be prepared to be investigated by HMRC. This investigation can be backdated by up to six years, and any owed tax from that period will be claimed back by the government.
Determining your IR35 status
Finding out whether or not you are inside or outside IR35 will determine whether or not you should be paying more tax and national insurance. For clarification, HMRC has developed an online employment status tool (CEST) for contractors unsure of their liability under IR35. HMRC uses the following factors to test your IR35 eligibility.
If the contractor or the end business is able to send a substitute to complete works in the contractors' place, this suggests the contractor isn’t providing a personal service, and the worker isn’t a disguised employee.
If an end business controls the workload of the contractor or how the work is carried out, it suggests the person is inside IR35 as they are not providing a specialist service as a contractor.
3. Mutuality of obligation (MOO)
If both parties pass the above tests, it is unlikely that MOO applies as it will be deemed outside IR35 anyway. MOO can be present in both contracts of service and contract for service.
4. Risk – If a contractor can make a profit or a loss i.e. financial risk this would suggest that the contractor is outside IR35.
Taking responsibility for IR35
As stated above, the responsibility of determining and declaring whether or not IR35 applies no longer sits with the contractor alone. End user clients are now responsible for determining and paying for contractors that could be deemed as “disguised employees”. So, if your company or you are investigated by HMRC and found to be inside IR35 when you have stated that IR35 does not apply to you, then both the contractor and the end user client will be held responsible, and ordered to pay any unpaid tax from up to six years prior to the investigation taking place.
These reforms are put in place to ensure that both parties are paying the correct amount of tax and national insurance to the government and to ensure that future contracts of employment are scrutinised by both involved parties. Putting the onus on both the employer and end user client requires careful consideration by all who are involved when following the IR35 rules. For a confidential discussion about your hiring challenges, contact us today.
This material is intended for general information purposes only and does not constitute legal advice. Specialist legal advice should be taken in relation to specific circumstances.