The proposed IR35 reform due to be implemented from 6 April 2020 has been delayed for one year to 6 April 2021 in response to the COVID-19 outbreak. Details below have been updated to reflect the new date of implementation.

From 6 April 2021, there will be a radical shift and a renewed focus by HMRC towards situations where workers provide their services through Personal Service Companies (PSCs) for the private sector, aimed at medium and large employers – the end users. This follows similar rules previously introduced for public sector organisations. Coming into the spotlight will be the status of workers as either employed or self-employed. Where HMRC successfully challenge the status, these new rules set out who bears responsibility for underpaid tax in the labour supply chain.

Who will be impacted?
End users of workers’ services, intermediaries and agencies will face an increased tax compliance burden. End users will need to decide if the person providing the services through a PSC is effectively doing so as an employee. HMRC will be auditing medium and large employers from 6 April 2021 to ensure they have performed appropriate checks to determine the status of their off-payroll workforce and their compliance with the new rules.

We have already seen a knock on impact in the contracting industry following the recent public sector rules coming into effect. Given the uncertainty and complexity of the regime, many organisations have chosen not to engage contractors anymore, instead bringing workers on to the payroll or ‘playing safe’ by deducing PAYE and NIC from their invoices. This has major implications for all concerned across the related labour supply chain.

For the private sector, HMRC have just announced that penalties for inaccuracies will apply only in cases of deliberate non compliance in year one of the new regime. Although this ‘light touch’ is welcome, many businesses will face unexpected tax liabilities if they are not adequately prepared to implement the changes from the outset.

Key indicators of employed and self-employed
In determining the status of a worker, the whole picture needs to be reviewed through various factors and status indicators; and weighed up in relation to the contract. Key indicators are listed below:
• Financial risks and profit opportunities
• The time period of the engagement and contract termination
• Control or supervision and the number of engagements
• Right or ability to substitute the worker
• Equipment for the job
• Intention of the parties and mutuality of obligation

HMRC has advised that worker status can be checked using their online Check Employment Status tool (CEST); provided the contract mirrors the service carried out in practice by the worker. In our experience, CEST appears very sensitive to the data input and the outcome can be different with even a small change to the answers provided. In particular, the tool tends to point towards self-employment status where control is indicated to be minimal by the end client, without necessarily considering all the factors. This can lead to uncertainty in some situations.

How should end users and PSCs prepare for the new regime?
The end user will be legally obliged to produce a ‘status determination statement’ for each contractor based on individual decisions in line with the above. A contractor can query this decision and is able to challenge the determination in writing if they believe it is wrong. The end user then has 45 days to explain their reasoning.

Where ’employed’ worker status is determined, continuing to engage through a PSC rather than as an individual is likely to have fewer tax advantages than before and will result in significant complexities from a tax compliance perspective, therefore many existing PSCs may cease to trade.

We advise end users and PSCs to prepare for the changes now by taking measures to check the impact of the new IR35 regime.

Next steps
If you think you may be affected by the new IR35 regime either as an end-user organisation, intermediary, agency or contractor, or if you are simply concerned about your self-employed status please contact your usual Campbell Dallas contact or:

Mark Pryce
Tax Partner
0141 886 6644

The information in this blog should not be regarded as financial advice. This is based on our understanding in March 2020. Laws and tax rules may change in the future.