Important Changes to the IR35 Rules

What’s the issue?

In summary, the IR35 rules apply to large and medium sized businesses who use consultants operating via a personal service company (PSC), also known as contractors. These changes affect the way that tax is collected and may present a material risk to your business if the situation is not carefully managed.

If your business is not exempt and you have consultants who fall within the new regime, this could have significant cost implications for your organisation. Currently, the onus is on the PSC to determine if IR35 applies by determining a contractor’s employment status for tax purposes and operating PAYE tax and paying Employer’s National Insurance Contributions (‘NICs’) if it does.

The primary risk from April 2021 is that this burden shifts to any non-exempt business that hires consultants, with the effect that the organisation may become responsible for paying PAYE and NICs on their behalf. If your consultants are paid gross, as is normal with this type of arrangement, HMRC can recover any tax that they deem to be unpaid from the hirer.

Furthermore, HMRC can look back 4 or 6 years from the end of the relevant tax year to determine whether correct tax has been paid. Interest will be charged on any unpaid amounts and HMRC can also charge penalties which can be as high as 100% of the tax which has not been paid.

All of this means that a potentially large tax bill can inadvertently start to accrue with effect from 6 April 2021.

What action should you be taking now?

From a tax perspective, clients should:

• review their agreements with consultants/contractors and seek a confirmation of the tax position;
• carry out a health check of the working practices within their organisation and consultancy arrangements, to determine compliance with the new legislation;
• where necessary, seek advice on any required communication with HMRC on this area of taxation; and
• conduct an annual review of their working arrangements – IR35 is a moving feast, with case law playing a key part in interpretation and application of this area of the law.

From an employment law perspective, clients should:

• obtain employment lawyer input on alternative ways of engaging people to avoid risks associated with the new IR35 rules.  There are multiple options that are potentially available, ranging from engaging with the consultants individually, hiring them as workers or engaging them as employees on zero hours contracts, depending on the facts of each case;
• prepare fresh or otherwise update existing consultancy or employment agreements, to take into account any amendments needed in light of the new rules;
• carry out a “health check” of their working arrangements and agreements with consultants/contractors to highlight key risks, such as the risk of deemed employment status giving rise to statutory employment rights (such as the right not to be unfairly dismissed);
• seek advice on changing a company’s working practices to reduce potential problems with the new law;
• ensure that adequate consultation is engaged in with your contractor or consultant workforce if changes are going to be made.