The new IR35 changes, also known as the Off-Payroll Rules, come into effect on 6 April 2021. As UK organisations struggle to maintain a flexible labour force while attempting to rebuild following the pandemic, employers that use limited contactors will now face a tax and regulatory change that has caused considerable consternation.
IR35 in a nutshell
Where the client of a contractor’s personal service organisation is a medium or large business, it is that organisation that will now be responsible for assessing the tax status of the contractor in question. A medium or large employer is one that has a turnover of more than £10.2 million, or a balance sheet total of more than £5.1m, or more than 50 employees.
A failure of an organisation to take reasonable care could lead to the tax liabilities in question being transferred to the client.
Previously, Mr Smith, the putative contractor in question, could make his own decisions as to how he operated his personal service organisation and deal with any inquiry from HM Revenue and Customs as to the question of his true tax status. To make matters more confusing, the legislation requires organisations to ask and answer a hypothetical question: “If the contract we have with Mr Smith was instead a contract directly with Mr Smith, and not his limited organisation, would Mr Smith be regarded as one of our employees for income tax purposes under that contract” It is this question that is, in effect, the ‘condition’ which is stipulated by the legislation as requiring a reasonable answer.
Once the organisation answers the necessary hypothetical question, it will then have to issue Mr Smith with a ‘Status Determination Statement’ (SDS) if it wants to continue using him as a contractor. This SDS statement will need to state whether the condition in question applies or not.
It is no surprise that the advent of these measures reportedly made many public organisations decide to stop utilising business contractors. As a matter of common sense, the compliance burden made many feel that it was simply too much work, administration, and potential tax risk to continue using a labour resource that has always been a necessary part of the flexible workforce that made the UK a dynamic economy. And in the current climate on-boarding previously independent contractors to become ordinary pay as you earn (Paye) employees can bring its own challenges, not least of which the commitment and investment that employing new people bring with it.
Such a knee-jerk reaction, while understandable, is ultimately unnecessary. Organisations can and will continue to use contractors, not least because the economic uncertainty caused by the continuing shocks of the Covid-19 (Coronavirus) pandemic will require the utmost flexibility with respect to the provision of services.
Those HR professionals who take a structured and consistent approach in advance of April 2021 can use the legislative headache to both take stock of their workforces, as well as assessing where and when they can continue to utilise contractors.
Nick Gilbey is a chief technology officer at Wolf IR35 Legal Services.