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IR35 tax reforms: HMRC answers our questions

Jonathan Berger Jonathan Berger

In April 2021 the IR35 tax reforms will come into force. In anticipation of these changes Jonathan Berger asked HMRC some questions about the reforms. You can find all of their answers here. 

The changes to the rules for off-payroll workers (OPW) will impact large and medium-sized organisations engaging these workers through intermediaries, most typically personal service companies (PSCs).

What are the IR35 tax reforms?

From 6 April 2021 onwards, the responsibility for determining whether or not a contractor is deemed an employee for tax purposes shifts to the end-user of their services. This means that these entities could now be liable for PAYE and National Insurance Contributions (NIC) on their population of contractors within scope of the updated off-payroll working rules, referred to as 'IR35'.

There will also be changes to the rules for public sector entities. Since April 2017, the obligation to assess the employment status of contractors and potentially withhold income tax and NIC moved to the public sector engager.

However, from 6 April 2021, the public sector rules will align with those being introduced in the private sector, meaning that public sector bodies will now need to issue status determination statements in respect of the engagement. In addition, public sector entities must also implement a dispute resolution process.

Taken together, these are significant changes to the IR35 rules and are likely to result in significant additional compliance burdens.

Whilst the theory behind the legislation is relatively straightforward, there are many practical considerations when applying the new rules. These include how to identify contractors, the best approach to assessing their employment status, communication with relevant parties and managing potential disputes.

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HMRC answers our questions about the IR35 tax reforms

HMRC has published guidance on these changes to the IR35 rules to help relevant parties understand their application and the practical requirements.  However, there are areas where organisations are still potentially unclear on them, so we went to HMRC with a list of our clients' most frequently asked questions. 

Will the introduction of the updated IR35 legislation, applicable in the private sector, be delayed again in April 2021 given the ongoing Covid-19 pandemic?

In March 2020, the government announced that the reform was being delayed - not cancelled - and parliament has passed the legislation to ensure the reform to the off-payroll working rules takes effect on 6 April 2021.

Delivery of our updated education and support programme is well underway and we are actively reaching out to stakeholders, industry and contractors to help them prepare for the reform.

HMRC is committed to supporting businesses and individuals in the run up to, and beyond, the reform coming into force, and is delivering an extensive programme of work to achieve that. We are working towards the reform coming into force on 6 April 2021.

There have been criticisms about HMRC's Check Employment Status for Tax (CEST) tool since its inception in 2017 and still following the enhancement that was published in 2019. Can HMRC advise whether the tool provides accurate results and can be relied upon by clients when coming to their conclusion?

HMRC developed CEST to help organisations and individuals determine employment status for tax and decide whether the off-payroll working rules apply. We will stand by CEST’s results provided accurate and correct information is used, in accordance with our guidance.

The CEST service was developed in conjunction with tax specialists, contractors and other stakeholders and it was rigorously tested against established case law and settled cases to ensure it provides accurate results in line with current binding judgements. CEST provides accurate results and HMRC stands by its results, provided accurate and correct information is used in accordance with our guidance.

In practice, will HMRC accept a 'role-based' assessment in cases where workers’ fact patterns only differ slightly? If so, can HMRC provide examples of when a role-based assessment would be appropriate?

It is acceptable for a client to make a determination for a group of workers, providing those workers are engaged under the same contractual terms and conditions, and in practice work under the same terms and conditions.

However, if determinations are made for groups of workers where the terms and conditions are not the same, this may not be taking reasonable care. If there are differences in terms and conditions, each status determination should be made on a case-by-case basis.

Within HMRC’s guidance, it suggests that “reasonable care” will be viewed in light of the abilities, experience and circumstances of each client. Practically, how will reasonable care differ between smaller and larger businesses?

A client organisation must always take reasonable care, regardless of its size, when determining whether the off-payroll working rules apply to an engagement. If the client fails to take reasonable care, the responsibility for the deduction of tax and NICs, and the payment of the apprenticeship levy and paying these to HMRC will rest with it.

Levels to which a client organisation satisfies itself in having taken reasonable care will vary on a number of factors, for example; having a complex workforce or labour supply chain.

Failing to reconsider determinations where there has been a material change in circumstances and failing to take account of all relevant evidence are both examples of not taking reasonable care.

Examples of behaviours that would indicate a client has taken reasonable care include can be found in the Employment Status Manual

We are aware that HMRC intend to take a 'light touch' approach to penalties once the updated legislation is implemented, what does this mean and how long will it last for?

HMRC will take a light-touch approach to penalties meaning that customers will not have to pay penalties for inaccuracies relating to the off-payroll working rules in the 2021/22 tax year regardless of when the inaccuracies are identified, unless there is evidence of deliberate non-compliance.

In addition to the light touch approach on penalties for inaccuracies, HMRC has also committed to not use information acquired as a result of the changes to the off-payroll working rules to open new compliance checks into workers' intermediaries for previous tax years.

How will compliance operate to ensure that the off-payroll working rules are applied correctly?

HMRC will use a specialist team to carry out all our off-payroll working compliance activity.

If customers have a Customer Compliance Manager (CCM), we’ll continue to use that relationship to manage and assure compliance with the off-payroll working rules. HMRC has outlined its compliance approach for the off-payroll working rules. Our priority is to support customers to be compliant, as well as intervening when we find non-compliance. 

HMRC has been working extensively with stakeholders to provide education and support to those affected by the off-payroll working changes in April 2021, supporting them to help them get things right. HMRC's education and support has included hosting webinars and workshops, attending events hosted by other organisations and offering 1-2-1 calls for organisations who need additional support. We have also provided further support via factsheets, articles, technical manuals and social media to help organisations and individuals prepare.

In addition to our education and support, HMRC has been working on its future compliance strategy details of which have been published on GOV.UK.

Where the CEST output is undetermined, what does HMRC suggest businesses should do in order to satisfy themselves regarding employment status in such cases?

In some cases, CEST may produce an undetermined outcome where factors are finely balanced. There are a number of steps a business can consider after CEST produces an undetermined outcome.

These include:

  • Talking to your contractors/hiring managers to ensure that the working practices have been correctly represented
  • Consulting with internal advisors or others with knowledge of the working arrangements
  • Use HMRC's ESM manual ESM0500 to help come to a final conclusion

HMRC has provided users with CEST guidance which can be accessed via the tool’s landing page. The guidance provides additional detail on CEST questions and how these are considered within the tool. HMRC also has a dedicated helpline which supports those who have queries on specific CEST questions. For those more finely balanced cases where CEST produces an undetermined outcome, we provide detailed guidance, including in the Employment Status Manual.

Will HMRC allow companies for whom a liability has been deemed under the off payroll rules to reduce their liability by any PAYE deductions in respect of this arrangement by an entity further downstream?

Set-offs cannot be considered in Chapter 10 scenarios as there is no legislative provision to do so. The legislation does not provide for a set-off for the client organisation or deemed employer of any income tax, NICs, income tax paid on dividends or corporation tax paid by the PSC/worker.

There is no direct relationship between the worker and the client organisation/deemed employer, there is more than one legal entity involved with the individual and there are multiple heads of duty in play. HMRC compliance teams can only work within the remit of existing legislation.

The fee payer can deduct certain expenses (e.g. travelling expenses) under the deemed employment calculation, given the lack of transparency in the contractual chain on such costs, would HMRC accept a fixed sum being taken?

Expenses will only be allowable deductions under the off-payroll working rules if those expenses would be allowable for a direct employee.

The off-payroll working rules do not change existing rules on expenses. Since April 2016, where the off-payroll working rules apply, a contractor is not entitled to claim tax relief for ordinary commuting expenses. This will continue to be the case.

What transmission methods for an Status Determination Statement (SDS) are acceptable?

The off-payroll legislation does not specify a particular transmission method a client organisation or other parties should use to issue or pass on the SDS. Client organisations should ensure that the worker and the party they contract with are knowingly able to receive or access the SDS. For example, this could be an email, a letter or provided through an online portal.

For an SDS to be valid, the client must take reasonable care and must include the client’s status conclusion and reasons for that conclusion. The SDS must then also be passed directly to the worker and should be passed to the party that the client organisation contracts with in order to discharge any responsibility for accounting for any tax and NICs due.

How does the residency of a worker affect the off-payroll working rules?

The off-payroll working rules do not affect the application of tax residency rules and the same considerations should be made as if the worker was engaged directly. If the worker would be chargeable to UK tax or NICs if engaged directly, then the off-payroll working rules should be considered, this applies even if the work is done abroad. Where the worker's intermediary is registered is not relevant when deciding whether the rules can apply.

Many organisations who engage overseas workers will already be considering residency for their employees and should be able to apply the same processes to their contingent workers. Where the rules do apply to an engagement, client organisations should treat them as they would any new employee by issuing a new starter checklist or taking their P45.

How often can a contractor dispute their Status Determination Statement (SDS)?

The off-payroll legislation requires client organisations to have a status disagreement process in place to deal with disputes of SDS by contractors (workers) and deemed employers.

There is no cap on the number of representations that can be made by a contractor or deemed employer and representations can be made at any time before the final chain payment is made in relation to that engagement. Client organisations will be able to stand by an SDS if a dispute is made on the same grounds without any new information.

How often should clients re-assess employment status of existing contractors to demonstrate reasonable care?

Changes to contractual terms and working practices of an engagement could result in changes to the correct status determination or could effectively result in one engagement ending and new one (with different contractual terms and working practices) beginning.

Terms and conditions may shift over time and client organisations should consider whether these changes result in a new engagement. Whenever there is a new engagement a client will need to issue a new SDS.

Where a contract is extended, an extension may result in a new contract, for example because terms or working practices have changed or because the client chooses to issue a new contract to achieve the extension. In this case, the client organisation is required to issue a new SDS. If, however, a contract is extended but on exactly the same contractual terms and working practices this may not be a new contract and if so, no new SDS will be required.

If it is known and planned, when making a status determination, that the contractual terms or working practices will change and so the determination does not represent the true nature of the engagement, then this will not be regarded as taking reasonable care.

Reasonable care should always be taken when determining the employment status of a worker for tax and any SDS should be issued directly to the worker and any party the client organisation contracts with, in order to discharge responsibility for accounting for any Income tax and NICs that may be due.

Issuing the SDS to a worker gives them clarity over their tax position as they will know whether payments they receive will already have been taxed, or whether payments will be received gross and so tax and NICs are still due. Having the SDS will also allow the worker to understand the client organisation’s reasons for their status determination so the worker can decide whether or not they disagree with that status determination.

How can we help our clients?

We are supporting our clients to prepare for the upcoming IR35 tax reforms. Our support starts with a conversation with you about your business and to discuss how you utilise off payroll workers (OPWs) within your organisation and to then agree how we can best support you navigate the practical requirements to ensure compliance.

To provide an idea of some of the ways we have helped our clients, this includes:

  • Facilitate workshops containing a mixture of technical guidance, discussion and group input. These can help to gain buy-in from internal stakeholders involved in the engagement of contractors
  • Data analytics to identify the population of OPWs within your organisation
  • Confirmation of the scale and complexity of the ‘as-is’ position and assess the potential past, present and future risk to your business
  • Employment tax analysis of the IR35 and cost implications of your labour supply chain, communications to affected parties
  • Training for key stakeholders
  • Updates to engagement processes including appeals to the SDS

In addition, we have developed a market-leading tool to monitor and assess contractors. Our Employment Status Intelligence Platform (ESIP) provides an assessment outcome every time and:

  • Collects the information required to enable status assessments of your workers to be performed in less time and with greater consistency.
  • Provides a database to store and monitor new and existing OPW population, including a risk rating in all cases, highlighting how often each OPW should be reassessed while they continue to be engaged
  • This can extend to stakeholder communications and can also include functionality to manage appeals from contractors in line with legislation

Based on our experience supporting our clients with the implementation of IR35, businesses should consider their position as soon as possible to allow time for all the necessary stages to effectively manage the change and to properly assess the impact of the new rules.

If you would like to book a demo of ESIP you can do so here and one of our team will get back to you.