It has been accepted that, to encourage investment, self-employed entrepreneurs who run their own businesses receive tax advantages.
However, by using a personal service company (PSC), a managed service company, or an agency, small micro contractors who principally service just one end user or client have blurred the line between them and those who are genuinely self-employed. As a result, how HMRC views their tax status and treats their earnings has been affected.
Jas Dubb, an employment law specialist at the Wilkes Partnership says “There has long been concern that some contractors have been manipulating the system to pay less tax. Until now, it has been possible to claim the tax breaks afforded to the truly self-employed by placing an intermediary between them and their end user or client”.
He continues “To combat this abuse, HMRC implemented the IR35 regime as a legislative framework to deal with the tax status and treatment of contractors. In effect, it identifies contractors who supply their services through ‘relevant intermediaries’ and applies a test to determine whether their earnings should be subject to PAYE tax and National Insurance (NI)”.
In April 2017 ‘off-payroll working’ rules were introduced. This bought contractors working for public sector organisations under the IR35 regime where the working relationship had been subject to a positive ‘status determination’. Jas explains “The question at the root of the issue is: if the service was not being provided through a PSC or an agency, would the contractor be providing the service personally and therefore be classed as an employee?”
Plans were in place to extend the IR35 regime last year to include contractors working in the private sector. The Covid-19 pandemic, however, forced the government to postpone implementation until 6 April 2021.
Jas explains “Briefly, if a contractor provides a service through a ‘relevant intermediary’ from 6 April 2021 it will be subject to a ‘status determination’ test. If that test deems the relationship to be akin to an employment relationship, ‘off-payroll working’ rules will apply. This means the contractor’s income will be subject to PAYE and NI, and the end user or client will be required to deduct tax at source and pay employer’s NI contributions”.
Delaying implementation has not changed the rules:
- Contractors who provide their services through a ‘relevant intermediary’ in the private sector will be subject to the extension to the IR35 rules
- The burden shifts to the end user or client to carry out a ‘status determination’ and to provide a Status Determination Statement (SDS) to the intermediary or contractor directly
- If the SDS deems the contractor to be an employee, the end user or client is responsible for deducting PAYE/NI at source.
If you would like to know more about the IR35 reforms, take a look at this article that Jas published last year ahead of the original implementation date of April 2020.
A final comment from Jas “This extension of the IR35 rules only affects ‘large and medium’ sized businesses; small businesses will be exempt from having to carry out the ‘status determination’ and implementing the IR35 reforms”.
Jas Dubb is an Associate Solicitor in the Employment team at the Wilkes Partnership. If you have any questions about this issue or any other employment related matter, you can contact him on 0121 710 5929 or at [email protected].