As a result of the COVID-19 pandemic, the UK Government made the decision to delay the implementation of IR35 reforms to the private sector from April 2020 until April 2021 (see our previous blog post on this here). As a reminder, the IR35 reforms (commonly referred to as the “off-payroll working rules”) are intended to apply to any individual who, but for the supply of their services through an intermediary, would otherwise be an employee of the end-user client receiving the service. These rules will impact medium and large businesses in their role as the end-user client. From 6 April 2021, private sector businesses will become responsible for determining the employment status of contractors, regardless of whether they supply their services through a personal service company directly to the end-user or via an agency. The new rules will effectively see a shift in current responsibility on status determination, from the contractor to the end-user client. The changes will not apply to small businesses that engage contractors through an intermediary.
The final version of the off-payroll working rules has been confirmed in the Finance Act 2020 (the “Act”), which received Royal Assent in July of this year. The legislation remains in largely the same format as before the pandemic; however, there are some key changes to bear in mind:
- End-user client must have UK connection: The rules do not apply to end-user clients that have no UK connection. However, if a non-UK end-user client has a connection through a “permanent establishment” (click here for HMRC guidance), the end-user client will be responsible for operating the off-payroll working rules. HMRC will pursue the debt through the UK permanent establishment if this debt remains unpaid.
- Small company exemption: There is now a legal obligation on the end-user client to confirm whether they are exempt due to size requirements. By way of reminder, a company will be exempt from the off-payroll rules if it is considered “small” for the purposes of the Company Act 2006. A company would be deemed “small” if it meets two or more of the following conditions: (i) has an annual turnover of not more than £10.2m; (ii) has a balance sheet total of not more than £5.1m; and/or (iii) has not more than 50 employees. If sent a request by a worker or contractor, a 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 enforced by an injunction.
- Services provided prior to 6 April 2021 not in scope: If services were all provided prior to 6 April 2021 but payment was made on or after this date, the payment would not be subject to the new rules. If a payment is made for services which were provided before and after 6 April 2021, a just and reasonable apportionment should be made (i.e. the new rules would only apply to the part of payment relating to services provided after 6 April 2021).
- Definition of intermediary, where intermediary is a company: Under the Act, where a company is an intermediary, the definition has been extended to also include any company from which either: (i) the contractor has received a payment; or (ii) is entitled to receive a payment. The draft legislation had previously only included companies in which the contractor/worker held a material interest (i.e. more than 5%). This amendment will undoubtedly increase the number of situations where end-user clients will need to consider whether the off-payroll working rules will apply.
HMRC has confirmed that the next Employer Bulletin in October will provide further support by way of a series of webinars, updated guidance and helpful communications resources for employers to cascade to contractors and organisations they engage with on these issues. HMRC has also confirmed in its August Employer Bulletin that it will stand by results given by the CEST tool (explained further in our previous post), regardless of when the tool is used.
Whilst April 2021 seems a long way off, particularly with many businesses still in the midst of dealing with the consequences of the pandemic, taking time now to ensure that you are ready for implementation of the new rules will help to ensure a smooth transition to the new regime. Should you need any assistance with your preparation or want to discuss the options that are available to you to prepare for this new reform, please get in touch with your usual Mayer Brown Employment Department contact.
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