Private Sector IR35 Reforms Confirmed For April 2021.
Last night, the UK Government voted through the planned private sector IR35 reforms to take effect from April 2021. The private sector IR35 reforms had previously due to take effect from April 2020 but they were delayed due to the Coronavirus pandemic.
This means that from April 2021, the onus will be on large businesses to determine if their contractors are working inside or outside IR35. Small businesses will be unaffected by this and the onus will remain on the contractor to make that determination.
Which businesses are classed as small businesses is defined by the Companies Act 2006 by meeting two or more of the following criteria;
- Annual turnover is no more than £10.2 million
- Balance sheet total is no more than £5.1 million
- No more than 50 employees
Why is the Government making these IR35 reforms?
HMRC believe that roughly one in 10 people in the private sector that should be paying tax under the current rules are doing so correctly and they estimate that the private sector IR35 reforms will bring in £3bn of additional tax revenue over the next 4 years.
The legislation is designed to ensure that contractors that are effectively disguised employees are prevented from operating as such and pay the same tax as employees do rather than paying less tax by operating through a private limited company.
How do I know if my contractors are working inside or outside IR35?
The Government have published a the Check employment status for tax tool, or CEST for short.
CEST has come in for a lot of criticism since it was first rolled out, with the determination results being given not being reliable enough to use as evidence in cases where HMRC have taken contractors to court.
Ultimately the determination will come down to the terms of the contract and the working practices. There are three key areas to look at in the contract to determine if you are inside or outside of IR35;
- Supervision, Direction and Control; how much control do you have over where, when and how your contractor completes the work they are contracted to do and their day to day work?
- Substitution; does your contractor have the right to provide a suitable substitute to replace them, or do you require the contractor specifically to work for you?
- Mutuality of obligation; are you obliged to offer your contractor work, and if your contractor obliged to accept it?
Even if the contract reads as if the contractor is a completely independent supplier, if your contractors are treated like employees in practice then this will come out in HMRC’s investigations.
Whilst far from being an exhaustive list, things to look out for in your working practices would be;
- being required to work set hours;
- being required to work at a specific location;
- requesting permission to take time off; or
- receiving benefits that employees would receive.
How can I stay on the right side of the private sector IR35 reforms?
At We Do Code, we believe that the private sector IR35 reforms are well intentioned, but there is a very real risk that genuine contractors are caught up in the crossfire between HMRC and those that are working as disguised employees.
We do not want to help those that are working as disguised employees continue to avoid paying the tax that they owe. However, we do want to help genuine contractors and their clients stay on the right side of the private sector IR35 reforms.
Most IT contractors will typically be working on a day rate basis where they are paid for the days that they work. The problem with this is that this typically also comes with working practices that are similar to that of employees, such as fixed working hours and requesting time off.
We believe that the best way of staying on the right side of the private sector IR35 reforms is to move to a new way of working with contractors and use statement of work contracts. Statement of work contracts would outline key deliverables and milestones that result in the contractor being paid by the client when those deliverables and milestones are met.
We Do Code can help you and your contractors put together a tailored IR35 Mitigation strategy, working with you to help you transition in to a new way of working, and ensure that you stay on the right side of the IR35 reforms.