The changes to IR35 mean that medium and large companies which engage individuals through intermediaries (including personal service companies) will take on responsibility for paying tax and National Insurance for some of those contractors.
This will significantly increase the cost and administrative burden of engaging such contractors. Getting ready for this change will be a significant project for businesses.
Changes to the IR35 rules which were originally due to come into force in April 2020 were delayed for a year due to the coronavirus crisis. Many businesses breathed a sigh of relief. However, MPs voted against proposals for a delay and the changes will come into force on 6 April 2021. With businesses focusing on the immediate impacts of the pandemic and Brexit, many could find that the extra time slips by in a flash. With penalties for getting it wrong, it pays to start preparing now.
What is changing?
Currently, under tax legislation known as IR35, if a self-employed individual provides their services to an end-user through an intermediary (usually their own limited company), it is the responsibility of that company (rather than the end-user) to determine whether the contractor is a "deemed employee" for tax purposes. The company must account to HMRC for income tax and NI contributions.
Now, from April 2021, private sector end-users will be responsible for assessing such contractors' tax status and operating PAYE for them. These rules will apply to all businesses except small companies (i.e. those which benefit from the small companies accounting regime).
These end-users will need to:
- determine whether they need to pay income tax and NI for each individual engaged through an intermediary;
- issue each such individual with a written statement setting out the determination of their status and the reasons;
- deduct income tax and NI contributions through PAYE; and
- set up a process by which the individual can challenge the end-user's determination of their status.