Private sector firms will have to take responsibility for confirming the true status of their relationships with consultants from 6 April 2021, this introduction having been delayed by a year due to the financial impact of the pandemic.
IR35 (also known as the “off-payroll working rules”) is a set of regulations that are intended to make sure that employment taxes are paid where a consultant provides their services via an intermediary (usually their own personal services company) and is considered, for tax purposes, to be an employee of the end user business.
The existing rules have often been criticised for being overly complex, disruptive to business and poorly executed by HMRC – in fact records show that the government department has more often than not lost the challenges to its related fines. To tackle those challenges, significant changes are being made in 2021 that will have a wide-ranging impact both on end user businesses and the consultants themselves.
Key changes in 2021
On 6 April 2021, the end user business will become responsible for establishing whether a contract engagement with a consultant via their intermediary (usually their own personal services company) falls within the rules. Up until then, it is the responsibility of the person supplying the services to make this determination. The rules will bring the private sector in line with the changes brought in for the public sector in April 2017.
This new legislation will only apply to medium or large businesses. There will be an exemption for end user businesses who are ‘small businesses,’ where the responsibility for determining the IR35 status of a contract will remain with the intermediary and the new changes will not apply.
It’s important to note that the government has included clauses in the legislation to ensure that medium or large businesses do not set-up arm’s length companies or subsidiaries to procure services from intermediaries. The legislation will apply to the parent company based on the aggregate amount of turnover and the aggregate amount of the balance sheet total of the connected entities. There’s no small business exemption for public sector organisations and the legislation will apply to all end user businesses engaging such workers in the public sector.
Check of Employment Status for Tax (CEST)Tool
HMRC offers a checking tool that is designed to determine whether the off-payroll working rules apply to the arrangement, and HMRC promises to stand by the outcome that is generated on certain conditions.
This tool, called ‘Check Employment Status for Tax’ and referred to as ‘CEST’, has in the past been criticised for its accuracy. However, it seems to have been improved through updates. Having said that, in a recent publication, HMRC has revealed that 19% of assessments carried out between 25 November 2019 and 24 November 2020 were undetermined (that being some 188,719 applications). Further, HMRC will only stand by the outcome if (1) accurate information is provided to the tool; and (2) the relevant guidance is followed.
A CEST Outcome could also be affected by subsequent changes to the relevant contractual or working arrangements, potentially even invalidating the original outcome.
Top 10 industries with the most freelance and contractor jobs according to Flexjobs. Contractors and engaged companies in these sectors are urged to review their relationships now.
- Computer and I T
- Accounting and finance
- Customer service
- Software development
- Medical and health
- Project management
- Education and training
B P Collins can help
If you engage a consultant or currently provide your services as a consultant through an intermediary (such as a personal services company), our clear advice is to act now to assess your engagements to see whether you fall within the rules.
For end user businesses, B P Collins can provide an onsite audit of your arrangements and give you a view as to whether an engagements falls within the rules and whether your agreement with your consultants should be restructured. Failure to do this could result in substantial tax liabilities and penalties for consultants and, if not corrected by 6 April 2021, this liability could extend to the end user business.
If you are also unsure about making a CEST Application or are considering a CEST Outcome and need an expert opinion, B P Collins can also help.