In the lead up to the year 2000, there was an increase in the number of workers leaving fulltime employment and setting up new limited companies. Those contractors became directors and shareholders of their own personal service companies, and whilst they no longer had access to any employment rights, they received preferential tax treatment for performing the same role that they were engaged to perform as permanent members of staff. As a result, the government responded by introducing the IR35 legislation to ensure contractors would pay the correct level of tax and national insurance contributions. Where a contractor is performing the same services as a permanent employee, and therefore found inside of IR35, they should pay tax on a PAYE basis.
In 2017, the legislation was refined in the public sector, where the obligation for determining IR35 status was transferred from the contractor to the public sector body. The Government estimate that the public sector reforms raised an additional £550 million in Income Tax and National Insurance contributions in the first 12 months that it was introduced. As a result, from April 2021, the private sector will align with the public sector and end-hirers will have the responsibility to determine whether a contractor is performing services inside or outside of IR35. It is important to note that the way IR35 assessed will not be changing; it is only the entity who is responsible for undertaking a review that differs. However, where a company fulfils the small business exemption, the onus of determining a status will remain with the contractor in an attempt to minimise any unnecessary administrative burdens on businesses. A company must meet two or more of the following conditions to qualify as a small business: an annual turnover of no more than £10.2 million, a balance sheet of no more than £5.1 million and no more than 50 employees.
NEW OBLIGATIONS IN THE PRIVATE SECTOR
The legislation dictates that there will be an obligation on the end-hirer to ensure they are using reasonable care when undertaking their IR35 assessments. There is a level of ambiguity in what will constitute as reasonable care, this will be determined on a case-by-case basis considering the end-hirer’s means and resources. In order to assess the status of a contractor, an end-hirer needs to ensure they have analysed the working practices and reviewed the contractual terms and conditions of the engagement. The requirement of reasonable care is ongoing, and end-hirers should regularly review their workforce to ensure assessments remain correct and up to date. Additionally, the end-hirer will also be required to provide a status determination statement detailing whether a contractor is inside or outside of IR35, coupled with the rationale for their conclusion. An end-hirer must provide this to the contractor and the fee payer in the supply chain. Consequently, the fee payer (usually the end-hirer or recruitment business in the supply chain responsible for paying invoices) must follow the determination and ensure the appropriate amount of tax and national insurance contributions are deducted. If the end-hirer fails to pass the status determination statement down to the next entity in the supply chain, the end-hirer will assume fee payer responsibilities.
End-hirers must also ensure that there is a process in place which allows their contractors or a fee payer to dispute their determination. From 6th April 2021, once a contractor challenges their status determination statement, the end-hirer will have 45 days to formulate a response. If the end-hirer is of the view that the original conclusion was correct, the original status determination can be upheld. If the end-hirer finds that the initial conclusion was incorrect, it must issue a new status determination to both the worker and the fee payer.
NEW OBLIGATIONS IN THE PUBLIC SECTOR
As mentioned above, public sector organisations have been responsible for determining contractors’ IR35 statuses since 2017. However, from April 2021, public sector organisations must now demonstrate reasonable care when assessing IR35 statuses and produce a status determination statement to detail the outcome of the assessment. Similarly, to the private sector, the status determination statements must also be provided to the contractor and fee payer and a challenge process should be in place.