New HMRC Rules For Self-Employed Contractors

Off-payroll working rules, known as ‘IR35’, were introduced in 2000 and require people who work in a similar way to an employee, but through their own limited company or other intermediary, to pay tax, and National Insurance Contributions (NICS) like employees. It is an attempt by HMRC to crack down on those seeking to avoid the increased tax and NIC costs associated with being classed as an employee by ‘disguising’ their employment.

IR35 rules changed for public sector organisations in April 2017 and will now change for non-public sector organisations on 6th April 2021. Under the new rules, the end-user (also known as the client, engager or hirer) will now be responsible for determining if the off-payroll working rules apply. The client is the organisation who is or will be receiving the services of a contractor.

The following four-part test is used to determine whether the new rules apply to the end-user:

1. Size – The revised rules will only apply to medium and large companies and will not apply if the end-user is a ‘small company’. A company will be classed as ‘small’ if it has two or more of the following:

an annual turnover not exceeding £10.2m
a balance sheet total of not more than £5.1m
an average of no more than 50 employees for the company’s financial year.

If a worker, or the person a client contracts with, is uncertain about the size of the end-user it can formally request confirmation from the end-user which must reply within 45 days of any such request.

2. Personal Service – An individual worker must personally perform, or be under an obligation personally to perform, the services for the end-user.

3. Qualifying intermediary – The services must be provided not under a contract directly between the end-user and the worker, but under arrangements involving a third party e.g. a limited company, partnership or another individual.

4. Deemed employment condition – Contractors must operate like an employee. The end-user is required to assess whether the contractor is employed or self-employed for tax purposes. Employment law tests of control, mutuality of obligation and personal service are relevant in assessing the employment status of the contractor for the purpose of the rules. Both contractors and end-users should seek Employment Law advice in respect of these tests on a practical level.

Once the end-user has determined whether the off-payroll working rules apply they must confirm its assessment together with reasons in a Status Determination Statement (‘SDS’) to be issued to the worker and any third party it contracts with. The end-user must take reasonable care in making that assessment as HMRC may review their decision. The end-user is also required to have a dispute resolution procedure to enable the contractor to challenge their assessment.

If the assessment concludes that the contractor is out of scope of IR35, the limited company or other intermediary can continue to be paid gross. If, however, the contractor is assessed as within IR35, the fee payer is responsible for operating PAYE and deducting employee National Insurance Contributions on the fees it pays to the limited company or other intermediary (excluding VAT).

Failing to comply with the IR35 rules can result in penalties from HMRC. However, we understand that HMRC will not issue penalties for any errors for the first year after the roll out of the rules, except in the cases of deliberate non-compliance.

To receive expert and tailored advice as to how this will affect your business, please contact Jan Cunningham, David Mitchell or Louise McNally in our Employment Team.