Under IR35, the engager (employer) will be responsible for deciding whether to deduct tax and National Insurance Contribution (NICs) from freelancers and contractors, operating via a Personal Service Company (PSC), as if they were employees.
The new IR35 rules do not affect small businesses, as defined by the Companies Act 2006, where they meet two or more of these criteria:
- Annual turnover is no more than £10.2 million;
- A total of fixed and current assets (before deducting current liabilities, long-term liabilities and deferred tax provisions) over £5.1 million; or
- No more than 50 employees.
Where a business grows from a small to a medium or large-sized business there is a two-year transition period before the IR35 regulations fully apply to that business.
Engagers are required to undertake this IR35 determination for every contract they agree with a worker. The official guidelines are as follows:
- Pass your determination and the reasons for the determination to the worker and the person or organisation you contract with
- Make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
- Have processes in place to deal with any disagreements that arise from your determination.
The Government has created an assessment tool, CEST, which can be found here. This can be used to assess whether the engagement is classed as employment or self-employment and a report can be printed out as a record of your assessment if challenged by HMRC.
If the determination results in a contractor being within the IR35 rules, you will need to deduct and pay tax and National Insurance contributions to HM Revenue & Customs via PAYE.
Where an employer fails to correctly identify a disguised employment scheme, the worker’s tax and National Insurance Contributions (NICs) become their responsibility.
Where you hire a contractor via an agency it is the responsibility of the closest intermediary to the PSC to calculate, deduct and pay tax and NICs via PAYE on the contractor’s remuneration.
The new IR35 rules for the private sector are set to come into force on 6 April 2021, with employers being urged to prepare now to ensure that they are adequately prepared ahead of implementation.
The soft-landing period in the first year of IR35
New guidance published by the Government ahead of the implementation of the off-payroll, or IR35, rules for the private sector has confirmed that penalties will be waived for the first 12 months of implementation.
The guidance confirms that it will be mandatory for employers to assess a contractor’s employment status for tax purposes via Status Determination Statement, with those not doing so facing financial penalties.
However, the first 12 months will see fines waived, other than in cases where there is evidence of clear and deliberate non-compliance.
HM Revenue & Customs (HMRC) also vowed not to use information collected under the new regime to open any enquiries into returns for previous tax years, unless it suspects fraud or criminal behaviour had previously taken place.
HMRC will also deploy a specialist team to handle off-payroll working compliance activity that will focus on ensuring businesses and contractors follow the rules. The team will also continue to work with representative bodies to monitor how the changes are affecting the contracting market.
Specific employment determinations will not be made by the Government, the guidance has confirmed, but it will provide support based on the ‘view of the employment status indicated and give advice on best practice to help you fulfil your obligations’.
The Government has also stated that it will aim to support businesses that are attempting to comply with the law, stating that businesses, which “take reasonable care to apply the off-payroll working rules correctly but still made a mistake, including making mistakes in status determinations” will not face penalties in the first year.
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