Insights

During the 2021/22 tax year, some important changes to the IR35 legislation came into effect which, if applicable to you and your business, could mean a significant change to the amount of income you receive and how you account for it.

Before 6 April 2021, if a private sector business engaged the services of a worker through that worker’s limited company (often referred to as a personal service company, or PSC) it was the responsibility of the worker to  determine whether they considered IR35 to be applicable. If the worker reviewed their situation and concluded that they were effectively an employee of the business engaging them, then they were caught by IR35, and their income had to be drawn from their limited company by way of salary.

With effect from 6 April 2021, the responsibility for determining the worker’s status has moved from the worker themselves, to the ultimate user of their services, i.e., the end client. Currently these changes only affect those contractors where the end client is either a medium or large sized business – effectively bringing their position into to line with the rules already in place for public sector organisations.

If your company engages these types of workers, it means that as their end client your company is responsible for determining their employment status and for withholding a deduction for PAYE and NIC if you conclude that they are deemed employees.  In effect the tax risk in engagements of this type has moved from the worker to the client.

If your business is large or medium sized (per the Companies Act definition) it will need to review if it engages the services of anyone through their own personal service company. If it does, it will then need to review the status of each of those contractors and where the contractor is considered to fall within the definition of a deemed employee, the company will need to issue a Status Declaration Statement (SDS), to confirm to that a deduction for PAYE should be made. If an SDS is not completed and provided to the next party in the engagement chain, the company will have failed in its legal responsibilities and could be liable for penalties as well as for the tax and NI deductions that should have been withheld.

How to be prepared for the changes

Be clear on what the new rules mean for your organisation, do they apply? If so, do you have any workers engaged in this way and for whom you need to complete a status review? Check that you understand what a status check requires and the resources available to help complete this exercise.

On reaching a conclusion regarding the worker’s status ensure that the company has documented the review process and how the conclusion was reached. There are two issues that will benefit from this; firstly, in the event of any HMRC queries the company will be able to demonstrate that reasonable care has been taken (which will help to reduce the imposition of any penalty charges) and secondly it will assist with any appeals that the worker brings against the company disputing the conclusion reached regarding their status.

HMRC has recognised that these new rules introduce a significant change for the relevant parties and has promised to be lenient in the first 12 month period that the new legislation is effective. It has advised that businesses will not be penalised for inaccurate status determinations unless evidence shows they were deliberately non-compliant. However, it is important to note that despite this promise the end client will remain liable to pay any income tax and NIC that HMRC determine should have been withheld at source because the worker is a deemed employee.

If you need advice about IR35 compliance, please contact us via partners@rjp.co.uk.