07 May, 2021
HMRC has recently extended the 'off-payroll working rules' - commonly referred to as the 'IR35 rules' - to the private sector, in order to tackle scenarios in which some contractors took advantage of the tax efficiencies of providing their services through a limited company or another type of intermediary, when in practice they essentially worked as an employee. Where the IR35 rules apply, a contractor will be 'inside IR35' and thus face income tax and national Insurance contribution burdens as though they were an employee. Those 'outside IR35' do not face this. Importantly, being deemed to be inside IR35 does not, in itself, mean that employment status is present.
The changes to the IR35 rules mean that the responsibility for making a determination as to whether the IR35 rules will rest with medium and large businesses in the private sector receiving a contractor's services. 'Small' businesses are exempt from the IR35 rule changes if two or more of the following criteria are satisfied:
Such changes came into effect on 6 April 2021.
If a business fails to undertake a determination when required, or if a determination is undertaken when required, but the business fails to exercise reasonable care or is purposefully deceitful in determining the IR35 tax status, such business could face HMRC investigation, significant fines and legal proceedings.
Clients and parties involved in hiring labour need to understand their new legal obligations and ensure that internal policies, practices and contractual documentation facilitate compliance. Clients will be required to carry out due diligence on their labour supply chains and ensure that this is appropriately documented. The extension of the IR35 rules to the private sector will certainly lead to increased scrutiny by clients and HMRC of engagements which intend to be genuine self-employment arrangements. Also, the talents of self-employed specialists could be lost across the industry as they are forced to either become an employee of a particular company or simply cannot be employed by clients who will no longer use the self-employed. The competitive playing field could be changing due to the extension of the IR35 rules.
Clients, therefore, would be strongly recommended to become acquainted with the IR35 rules and the possible impact on their business, investing appropriate time and resources so as to ensure compliance with the new rules that are in place. If clients intend to continue using self-employed individuals, it will be important for them to carry out due diligence and retain all documentary evidence of any determinations that are made in the event of any investigation from HMRC or otherwise.
Our Construction team have specialist lawyers from departments including the Commercial, Employment & HR, Governance, Procurement & Information and Dispute Resolution departments who are on hand to help you help you with the IR35 rule changes, ensure compliance and answer any queries you may have, for example:
For more information contact John Pickervance in our Commercial department via email or phone on 0333 207 1134. Alternatively send any question through to Forbes Solicitors via our online Contact Form.
Learn more about our Commercial department here