Change is coming
From 6 April 2021, every medium or large-sized business which is part of a labour supply chain must be aware of, and compliant with, its obligations under the off-payroll working rules (often referred to as "IR35").
The rules are changing, in respect of both how they apply, and who can become liable for a breach. Businesses need to understand how IR35 applies to them and their supply chain to be able to mitigate potential tax risks.
What do I need to do?
The purpose of IR35 is to ensure that those who work like employees pay broadly the same tax and social security contributions as those who are employees, regardless of the type of structure that an individual uses to provide their services.
Where IR35 applies, each business in the supply chain needs to be aware of its responsibilities, how to discharge them, and the repercussions if they don't. It is in the interest of every 'link' in the labour supply chain to be compliant and to ensure that information can flow efficiently through the chain.
Now is the time to have conversations with your contractors and review your contingent labour; identify where individuals are engaged through intermediaries of any kind in your labour supply chain; consider the logistics of implementation; work out who in your business will make status determination statements and manage any related disputes; and consider how records will be retained.
We were ready in April 2020…has anything changed?
The changes to IR35 were due to come into force in April 2020 but were delayed until April 2021 due to coronavirus. Since April 2020, there have been some changes.
Previously an 'intermediary' was defined as a 'personal service company', that is, a company in which the contractor holds more than 5% of the ordinary share capital. However, the final legislation has extended that definition significantly.
An 'intermediary' will now be regarded as any company from which a contractor has received, or has the right to receive, a payment which can be reasonably regarded as a reward for the contractor's services to the end user. This means that businesses may need to revisit any previous IR35 "readiness" exercise, in particular any contractual amendments such as warranties which refer to intermediaries or personal service companies.
What about my contracts?
We know that many companies reviewing their labour supply chain in preparation for the change in IR35 have been looking to use warranties as contractual protection, asking other companies in the labour supply chain to warrant that they were not "intermediaries" within the meaning of the rules. If you have given, or obtained, warranties of this sort, you will need to review and assess whether these remain suitable in practice. Businesses also need to keep an eye on timing. Where services under a contract were provided in full prior to 6 April 2021, but payment was made on or after this date, that payment will not be subject to the new rules. However, if services straddle 6 April 2021 then a just and reasonable apportionment of payment for those services should be made.
My business is small – do I need to do anything?Small companies are exempt from the new rules. A company is regarded as “small” for these purposes if it meets two or more of the following conditions:
- it has an annual turnover of not more than £10.2m;
- it has a balance sheet total of not more than £5.1m; and/or
- it has no more than 50 employees.
If a worker or contractor sends a company a request, that company must confirm whether they meet the small company exemption within 45 days of receiving this request. If no response is received, the worker or contractor can apply to the courts to have the requirement to confirm the position enforced by an injunction.
What are the risks?
Although HMRC has promised taxpayers a 12 month 'soft-landing' from 6 April 2021, businesses need to prepare now for the changes in April 2021. With HMRC investing significant resources into the provision of guidance, factsheets, webinars and marketing material, it is unlikely that a plea of 'ignorance of the law' will fall on sympathetic ears.
The legislation follows the trend of incentivising compliance through the supply chain by allowing liabilities to be passed to others where your business complies with its own obligations. However, in the event that one 'link' in the chain fails, a tax liability or debt may land on another 'link' elsewhere. The way the legislation is designed to work is to incentivise everyone in the chain to apply the rules as intended.
If you would like to discuss how we can help your business prepare for the forthcoming changes to IR35, please do not hesitate to contact the DWF Tax team or your usual DWF contact. You can also watch our webinar which considers these IR35 reforms and the impact the new legislation will have on your business.