The April 2020 rules, which were delayed and eventually came into effect from April 2021, introduced significant changes to the IR35 legislation in the United Kingdom.
These rules shifted the responsibility for determining the employment status of contractors operating through Personal Service Companies (PSCs) from the contractors themselves to the medium and large businesses in the private sector that hire them.
Under the new rules, engagers are required to assess the employment status of contractors and determine if they should be classified as employees or self-employed for tax purposes.
This change has brought about a fundamental shift in the tax landscape, placing more responsibility on engagers and potentially leading to higher tax liabilities for contractors deemed to be “inside IR35.”
The rules have prompted extensive discussions and adjustments in the contracting industry, as both contractors and engagers navigate the implications and ensure compliance with the revised legislation
IR35 changes from April 2021
The IR35 changes that came into effect from April 2021 have introduced significant alterations to the way contractors operating through Personal Service Companies (PSCs) are classified for tax purposes in the United Kingdom.
Here are the key changes:
- Shift of responsibility: The responsibility for determining the employment status of contractors has shifted from the contractors themselves to the medium and large businesses in the private sector that engage them. These organizations, known as engagers or end clients, now have the responsibility to assess whether the contractor should be classified as an employee or as a self-employed individual for tax purposes.
- Determination process: Engagers are required to use HMRC’s ‘check employment status for tax’ tool (CEST) to assess the employment status of contractors. The tool takes into account various factors, including the contractor’s right of substitution, the use of equipment owned by the end client, the degree of control exercised over the contractor, and the contractor’s ability to work with other clients simultaneously. The CEST tool provides a determination based on these factors, helping engagers make the correct tax classification decision.
The CEST tool used by HMRC to determine a contractor’s employment status is undergoing updates due to concerns over its capabilities and reliability. The complexity of the contracting industry and the various potential working scenarios make it challenging for the current tool to provide accurate and comprehensive assessments.
HMRC officials have stated that they will continue to honor the results generated by the current version of CEST. However, an updated model is being developed to better address the intricacies and complications inherent in certain contractor hiring situations. The aim is to create a tool that can provide more robust and reliable determinations, taking into account the nuanced factors that impact a contractor’s employment status.
What are the implications of IR35 changes?
The new IR35 rules have the potential to significantly impact contractors, resulting in higher tax liabilities and reduced take-home pay. Here are some key implications:
- Increased tax liabilities: Contractors deemed to fall inside IR35 will be subject to the same tax levels as employees, without receiving the associated benefits and job security. This can lead to a higher tax burden for contractors, reducing their net earnings.
- Lower take-home pay: Due to the increased tax liabilities, contractors may experience a decrease in their take-home pay. To compensate for this, they may need to raise their fees when negotiating contracts with their clients.
- Retrospective tax investigations: The implementation of the new IR35 rules could trigger investigations into previous decisions made by contractors’ Personal Service Companies (PSCs). This may result in potential retrospective tax bills if HMRC determines that contractors should have been operating within IR35 in the past.
- Conservative IR35 determinations: Some end-clients may choose to take a cautious approach and classify all contractors as falling within IR35 to safeguard their own tax positions. This means they would be responsible for paying employer National Insurance Contributions (NICs), prioritizing tax compliance over engaging contractors.
Given the complexity and potential consequences of the new IR35 rules, seeking professional advice is crucial. Specialist teams, such as those at Real Business Rescue, can provide expert guidance, understanding HMRC’s systems and procedures, and help contractors navigate the changes effectively.
The April 2020 rules have brought significant changes to the IR35 legislation, particularly in the way contractors operating through Personal Service Companies (PSCs) are classified for tax purposes. With the shift in responsibility for determining employment status from contractors to engagers, medium and large businesses in the private sector now bear the responsibility of assessing whether a contractor should be treated as an employee or self-employed.
This change has potential implications for both contractors and engagers. Contractors may face higher tax liabilities, reduced take-home pay, and the need to adjust their fees to compensate for the changes.
Engagers, on the other hand, must navigate the assessment process using HMRC’s CEST tool, which has faced criticism for its simplicity and reliability. It is important for both parties to seek professional advice and understand the intricacies of the new rules to ensure compliance and mitigate any potential risks.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.