IR35 Changes 2021: Guidance for Contractors

This simple plain-English guide for contractors explains the IR35 changes, how contractors will be affected, how to avoid IR35 non-compliance, and how Taylor Hopkinson are managing the IR35 reform. For further information on contracting, visit our contractor hub.

Updated: 16 March 2021

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Our recent IR35 webinars

We recently delivered two IR35 online webinars – one dedicated to our clients, the other to our Contractors. Alongside our experts here at Taylor Hopkinson, we invited Mike Herdman, Employer Tax Solutions Director at Grant Thornton UK LLP to join us at the client session to give an overview of the IR35 legislation, clarifying recent developments and giving general advice where possible to help you navigate the new rules.

Client webinar

Contractor webinar

Below we’ve broken the content into manageable chunks.

Table of Contents
IR35 Changes Postponed until April 2021 (⚡️NEW)
Government Updates – February 2020
IR35 – Off Payroll Working Rules April 2020 2021
What is the proposed change to IR35?
Small Company Exemption?
Making the status determination – “inside IR35” or “outside IR35”
When the Off Payroll Working Rules (“IR35”) apply
Assignments “Outside IR35”
Assignments Inside IR35 – How can Taylor Hopkinson support?
Incorrect determination
What are Taylor Hopkinson doing now to prepare for the IR35 changes?
IR35 FAQs
– I work for lots of clients, does IR35 still apply?
– The client does not understand / will not apply the new IR35 rules, do I need to worry?
– Can I be involved in the client’s status determination?
– I do not agree with the client’s status determination, can I appeal it?
– Can I be forced to pay for employer’s NICs?
– Do I get employment rights if I am “inside IR35”?
– My assignment is for 2 years – is it automatically “inside IR35”?
– Determining whether the assignment is inside or outside IR35
– Substitution
– Control and Direction
– Mutuality of Obligation
Benefits of Taylor Hopkinson Deemed Employment deductions service
IR35 Resources and Further Reading

IR35 Changes Postponed until April 2021

Following the introduction of IR35 reforms in the public sector in 2017, it has been confirmed the new rules will now be extended into the private sector, effective April 2021. These changes are not retrospective. IR35 rules were originally introduced in the UK in 2000, with the intention of ensuring that individuals who are working like employees but who operate via an intermediary, such as a Personal Service Company (PSC), pay broadly the same tax and National Insurance Contributions (NIC) as an employee would.

Overseas Clients

During the review concerns were raised about how the rules will apply where the client is overseas. The Government has listened to those concerns and will amend the legislation to exclude wholly overseas organisations with no UK presence from having to consider the off-payroll working rules. This means the existing rules for engagements outside the public sector will continue to apply to engagements where the client is wholly overseas, and the individual’s limited company will continue to determine the status of the individual.

What is the proposed change to IR35?

The reform will place the responsibility for assessing whether IR35 applies onto the private sector end user (our clients) of the worker’s (our contractors) services, for all payments by medium and large businesses from 6 April 2020. Where it is concluded by the end client that IR35 applies, the fee payer (in this case Taylor Hopkinson) will become responsible for accounting for and paying the related tax and NIC, including the additional cost of employer’s NIC, to HMRC.

Small Company Exemption?

The new rules will only apply to medium and large businesses in the private sector who are the end user of the worker’s services and to the fee payer, if different, such as fee payers in the recruitment sector.

The Government has indicated that it intends to use ‘similar criteria’ to that found in the Companies Act 2006 to define a medium-large business. Under current legislation this is broadly a business that has two or more of the following features:

• a turnover of more than £10.2m;
• a balance sheet total of more than £5.1m;
• 50 employees or more.

Making the status determination – “inside IR35” or “outside IR35”

From April 2021, it will be our clients’ responsibility to determine whether the Off Payroll Working Rules apply, i.e. is this assignment “inside IR35”? Companies can refer to the HMRC guidance and the employment status for tax (CEST) tool. Although feedback is varied, the CEST tool does give a good steer of the approach taken by HMRC and the indicators that they are looking for. HMRC have confirmed that they are making further enhancements to the CEST tool and these changes are expected to be delivered before the end of 2021. TH aims to work in consultation with clients who would like additional support with their assessments and reviewing a broad range of potential partner service providers such as Grant Thornton and Brookson.

When the Off Payroll Working Rules (“IR35”) apply

The off-payroll rules apply if a worker provides services to a client through an intermediary (Personal Service Company (PSC)) but would be classed as an employee if they were contracted directly with the client. Before 6 April 2021 it is the limited company’s responsibility to decide its own employment status for each assignment.

From 6 April 2021, how the rules are applied will change. All public sector authorities and medium and large-sized private sector clients will be responsible for determining whether the rules apply – i.e. are you “inside IR35” or “outside IR35”? Where the private sector client is considered “small”, limited companies will remain responsible for deciding the contractor’s employment status and whether IR35 applies.

Assignments Outside IR35

If the client / end user makes the status determination that an assignment is “outside IR35”, they must ensure that “reasonable care” was taken during the decision-making process and that the decision itself is reasonable. If reasonable care is not proven, the status determination statement will not be valid, and the client / fee payer will be liable for the unpaid taxes. HMRC have confirmed that it will issue detailed guidance in late 2021 which will include further details on “reasonable care”. There is also further guidance being requested around grey areas such as offshore working.

Assignments Inside IR35 – How can Taylor Hopkinson support?

Where clients determine that an assignment is “inside IR35”, we are working to ensure that several options are available to our contractors in terms of an alternative to an off-payroll model. The options are:

• “Inside IR35” PSC – Should an individual wish to continue to engage as a contractor via their PSC who is deemed “inside IR35”, Taylor Hopkinson will calculate a “deemed employment payment” using the RTI (Real Time Information) payroll system. The deemed employment pay rate is income after deductions, including both employee and employer NICs and the Apprenticeship Levy.
• Umbrella Company – Where an umbrella company employs a contractor as a worker directly, the off-payroll working rules do not apply.
• PAYE Agency Worker / Employment model – this would be based on a PAYE Contractual agreement with an Individual and would also be subject to other employment-related rights/ benefits such as holidays allowance / pension etc. We will discuss this and propose on a case-by-case basis If requested by our clients.

Incorrect determination

If the off-payroll proposals are legislated in their current form, where HMRC disagrees with the determination made, it can investigate and insist on back payment of tax, as well as fines for late payment from the fee-payer.

What is Taylor Hopkinson doing now to prepare for the IR35 changes?

TH is preparing for proposed new rules and monitoring all Government and industry announcements throughout late 2020. Final announcements around updates are ongoing, however for the last 18 months we have been regularly attending seminars and open sessions, monitoring news from the Government consultation process, as well as through advisory from Grant Thornton, CIPD, APSCo and other industry bodies.

• Internal TH project group formed across Finance, Operations, Contracts, Compliance and Senior Management functions, meeting regularly to review and plan strategy.
• Continuing a significant amount of planning work, prior to the delay, we are communicating with clients and contractors to determine the status of workers who operate via ‘off -payroll arrangements, such as PSCs, who could potentially be captured by IR35. We understand that this assessment will be completed for new and current roles and we commit to communicating results and offering compliant payroll solutions to all contractors whether deemed ‘Inside’ or ‘outside’ IR35;
• Review and modelling of all possible solutions for ‘inside IR35’ models including white label umbrella services and PAYE.

Continual updates and information sharing

• Having delivered three informative IR35 Webinars, we will continue to consider further sessions offering information, advice and a confidential opportunity to have questions answered by a tax expert.
• Our IR35 Contractor Survey feedback has helped shape our webinars and discussions with clients, as well as allowing us to directly answer key questions.
• We will continue to update our web content on our IR35 hub with articles and useful resources.
• We are working on an IR35 Brochure, to be shared with all contractors, providing information on our services and how they will evolve, including model calculations, options in terms of payroll models and also some general advice.

IR35 FAQs for Contractors

I work for lots of clients, does IR35 still apply?

The Off-Payroll Working Rules will still apply irrespective of how many clients and assignments a contractor is working on. There is the argument that if you are working on multiple projects for various clients, this will demonstrate that you are in business on your own account as an independent contractor, and therefore fall “outside IR35”. However, your IR35 status is assessed on an assignment basis – working for multiple clients is not a significant indicator of being in business on your own account; the IR35 status for each assignment is judged on its own merit.

The client does not understand / will not apply the new IR35 rules, do I need to worry?

From April 2021, all public sector authorities and medium and large-sized private sector clients will be responsible for deciding whether IR35 applies. If the client either 1) fails to make a status determination, 2) fails to pass the status determination down the supply chain, or 3) fails to take reasonable care when making the status determination; the client ( or Taylor Hopkinson as the recruitment agency) may be liable for the tax and NICs as the deemed “fee-payer”.

We will continue to engage with our clients and you as a contractor regarding the new rules to help to ensure that all parties are prepared for April 2021. It is important that clients exercise reasonable care when making a status determination, given the issues that arose from the public sector reform in April 2017 as a result of blanket “inside IR35” determinations.

If you are providing services to a small private sector client, they will be exempt, and they are not required to follow the new IR35 rules. Your PSC will remain responsible for determining your IR35 status and making the appropriate tax deductions and NICs.

Can I be involved in the client’s status determination?

It is expected that you will be involved to some degree in the client’s status determination process, as there are some questions in the HMRC CEST tool or similar tools which have been created, which require the contractor’s input – for example questions on how you run your business. However, there is no statutory right for a contractor to be consulted during the status determination process.

I do not agree with the client’s status determination, can I appeal it?

The draft legislation imposes an obligation on the client to provide a “client-led status disagreement process”, either the recruiter or the contractor may disagree and follow the process.

The client must respond to a request to review the status determination statement within 45 days. The client must either confirm the determination is correct, with reasons, or provide a new status determination statement reaching a different conclusion and withdraw the previous one.

If you disagree with the client’s determination, you will need to write to the client and give reasons why. You need to ensure you keep records of status determinations and any corresponding disagreements. During the dispute process, the client’s determination stands.

Can I be forced to pay for employer’s NICs?

Recruitment businesses cannot lawfully deduct secondary NICs from an agreed fee, but recruitment businesses may adjust the contractor’s pay rate to factor in the additional costs of supply which include employers’ NICs. Depending on your contractual terms, there may be scope for the rate to be negotiated accordingly.

Do I get employment rights if I am “inside IR35”?

Should you wish to continue operating as an “inside IR35” contractor, you will not benefit from any “employee rights” such as holiday pay, sick pay, pension contributions, dismissal rights etc. You may receive these benefits through your employment in your PSC.

If your assignment falls “inside IR35”, it is likely that you are no longer in business on your own account and could be within scope of the Agency Worker Regulations (AWR). Under AWR, you are entitled to comparable pay to a permanent employee on the client site. If you opt to engage via an umbrella company, you are an employee of the umbrella company and therefore you will benefit from employment rights and AWR will apply.

My assignment is for 2 years – is it automatically “inside IR35”?

The 24-month rule is in reference to claiming travel expenses. This rule has no bearing on the IR35 status of an assignment.

Determining whether the assignment is inside or outside IR35

To determine whether a contractor will fall Inside IR35, key criteria are reviewed to establish employment status. A decision is made about a hypothetical contract between the contractor and the end-client, and whether, if those two parties were contracting directly, there would be an employment relationship. However, the route to determining employment status is fact-specific and in some cases, there is no clear outcome.

It is worthwhile working through HMRC’s employment status for tax test and entering different responses to gain an understanding of the different outcomes. Essentially, if a contractor has similar working conditions, responsibilities and control as an employee of the client would have, then they are likely be classed as “inside IR35” (i.e. the Off Payroll Working Rules apply). Case law is evolving constantly in the tax tribunals, courts and employment tribunals but the key factors that determine a contractor’s IR35 status are as follows:

Substitution

A genuine right of substitution has long been deemed to be a very important factor when demonstrating that a contractor’s assignment falls “outside IR35”. For a substitution to be considered valid, the right to supply a substitute must be a genuine one. This means that the client must agree to it in practice, the contractor must pay for the substitute, and it should be an unfettered right. An unfettered right of substitution means that a client must accept a substitute if the initial contractor is unavailable. HMRC have now qualified the criteria within the CEST question on substitution, which states that a client’s need to be satisfied that the substitute has the skills and experience required or to ensure the substitute is approved under their security processes does not negate the right of substitution.

Control and Direction

In most cases where professional services are provided, it is important that a contractor can demonstrate a certain amount of autonomy in the way they undertake a project. Both the written contract and working practices must show that the client has no influence over how the contractor performs his/her services.
Control factors that may point towards an “inside IR35” status include:

• Indicating that the contractor will be supervised
• Including any “staff” benefits (including holiday or sick pay)
• Including start/end/break times
• Contractual clauses that specify any rights of control or supervision over the contractor.

The reality of the situation is that the individual is responsible for the delivery of the services. The individual will determine and control how and when they provide their services to the client, if they meet client-specific targets or project completion dates. It is worth noting that any clauses referring to control should be reflected in both the first tier (between recruitment business and client) and the second-tier contracts (between recruitment business and contractor).

Mutuality of Obligation

This is a hotly disputed area of law, as the position of HMRC is different from that of many practitioners and case law. It is an obligation between the parties to provide and accept work. In an employer/employee relationship, mutuality of obligation is easy to establish. However, in client/contractor relationships, it is less clear. HMRC states that by having a contract agreeing to provide services, mutuality is established but most experts consider the legal picture to be more complex. It is likely there will be more clarity on this in the coming months.
Other factors include:

• Provision of equipment
• Any absence procedures
• Continuity of the engagement
• Termination agreements
• Notice periods
• If the contractor has become “part and parcel” of the organisation.

Benefits of Taylor Hopkinson Deemed Employment deductions service

Continuity of Systems

Contractors continue to use Taylor Hopkinson RSM In-Time Timesheet system, process remains the same for monthly timesheets and invoice submission

Continuity of Service and Support Teams

Taylor Hopkinson Finance Team and Contract Support team remain the same – with familiar internal support function able to manage contract updates and any queries through initial pay runs

No Fees to Contractors / Workers

Taylor Hopkinson are absorbing the setup, integration and licensing costs for RSM In-Pay system, and our professional Finance Team are resourced to be able to provide ongoing service and support through this time of change (to both Clients and Contractors)

Transparency

A commitment will be made by Taylor Hopkinson to deduct and remit all required Taxes and NI monthly in line with legislation. This will include availability for audit and review of contractual templates at any time.

Communication

Direct and clear lines of communication between TH and Client around existing and new Contractors rates / issues / feedback without third parties involved.

IR35 Resources and Further Reading

Off-payroll working rules reforms postponed until 2021 (HMRC, 18th March 2020)
HM Government Good Work Plan, December 2018 (PDF)
IR35: working through an intermediary (gov.uk)
Guidance: Off-payroll working through an intermediary (gov.uk)
Policy paper: Rules for off-payroll working from April 2020 (HMRC, 11th July 2019)