Key things to know about IR35
What is IR35?
Known as the “Off Payroll working” rules, IR35 governs the tax position between Individuals who provide their services to a Client through an Intermediary (often a Personal Services Company). Until April 2021 the rules only applied to Public Sector Organisations but from 6 April 2021, the rules also apply to the Private Sector.
The rules were introduced with the aim of preventing tax avoidance. The intention being where an Individual would have “employment status” had they been providing service directly to the Client, then PAYE must be deducted before the Individual is paid.
Who is responsible?
Pre April 2021 the Intermediary was responsible for deciding whether or not IR35 applied. After 6 April 2021 responsibility lies with the Client engaging the Individual to assess the “employment status” of the Individual.
What should I do first?
1. Check if you are Small Business Exempt
A Limited Company or LLP will fall outside the scope of IR35 if they do not meet 2 or more of the following criteria:
- a turnover of more than £10.2 million;
- a balance sheet total of more than £5.1 million; or
- an average of more than 50 employees.
Unincorporated organisations are exempt if their turnover for the last financial year is under £10.2 million.
If you are small business exempt then you do not need to worry about IR35 unless you are part of a medium or large size group.
2. Establish a process for determining employment status
You can check the status of the Individual by using the “CEST” online assessment tool here https://www.gov.uk/guidance/check-employment-status-for-tax
HMRC have confirmed that they will accept a status determination using their online tool so long as the information used is accurate and the tool is used within the guidelines.
If the tool provides an undetermined result you will need to find an alternative way of assessing status. HMRC’s guidance and the HMRC status helpline may be useful.
Ideally you should do this before the engagement or as soon as possible afterwards if the Individual has already been engaged.
3. Issue a status determination statement
Consequences of not taking reasonable care when checking the Status
You need to be able to demonstrate to HMRC that you have undertaken a meaningful process to determine status. This requires you to keep a record of how the Individual’s tax status was determined, that a determination statement was issued and how any appeal was dealt with.
If the determination that an Individual is self-employed is found to be incorrect, the tax liability will become yours unless you can demonstrate you used reasonable care in assessing status and produce a determination statement to show otherwise. In addition HMRC may issue a penalty.
View our Employment and BattensHR services here.