Who Does IR35 Apply To?
The new rules are not going to apply to every company employing contractors through an Intermediary or Personal Service Company (PSC). If your company applies to at least two of the three following limits, then you will be within scope of the new IR35 rules:
- Turnover greater than £10.2m;
- Balance Sheet value greater than £5.1m;
- More than 50 employees.
Prior to 6th April 2021, if a company wants to engage an Intermediary or PSC, the liability of income tax and National Insurance falls to the PSC being engaged. It is currently up to the PSC to account for, collect and pay the PAYE, NI and Apprenticeship Levy contributions due. HMRC feel that this is leaving too many gaps that could be exploited by PSCs to pay less tax.
From 6th April 2021, if a company engages a PSC directly, the engaging company is responsible for completing a Status Determination Statement (SDS) for each PSC to check whether the work the PSC is being engaged to carry out falls under IR35 or not. If the PSC falls within IR35, then the engaging company will be responsible for deducting PAYE and NI contributions along with Employers NI and Apprentice Levy costs from the PSC’s payment.
If a company is engaging a contractor or PSC through an agency, then it is the agency that is responsible for collecting and paying PAYE, NI and Apprenticeship Levy contributions. However, this does not absolve the engaging company from its liability as they still need to carry out the SDS and could become liable for the various taxes if the agency does not collect and pay it.
The Tests
The tests that need to be applied to determine whether a PSC is an employee or not are as follows:
Does the PSC or Intermediary;
- have unsupervised access to decide their own workload and tasks
- have the right of substitution
- take some or all of the Financial Risk
- own or rent their own equipment
- get offered training or staff benefits by the engaging company
- function like a company in its own right (website, stationery etc)
- Is there a mutuality of obligation between the organisations
All of the above tests must be applied to each PSC to determine whether the relationship is inside or outside of the IR35 rules.
There is a Government checker that can be utilised called the Check Employment Status Test at the link below:
https://www.gov.uk/guidance/check-employment-status-for-tax
These checks can be done immediately and there is no need to wait until 6th April to run the check. In fact, it is much better to review all of your current PSC contracts that are likely to remain engaged after the implementation date well in advance. This will give you more time if you need to take any corrective action before the planned implementation date.
When completing the test, it is going to be incumbent upon the engaging company to make sure that the data they use for the test is accurate. That any material changes to the contract with the PSC are reflected and re-tested. That training is given to employees responsible for carrying out these tests. The engaging company should re-check each SDS at least once a year
What Do I Need To Have In Place To Engage a PSC?
Every company that engages a PSC after 6th April 2021 will need to have a robust policy for completing the SDS and determining whether a PSC falls inside or outside of IR35. HMRC are likely to make checks and they will want to see how the decision has been arrived at if they carry out audits.
There will also need to be contracts in place between the engaging company and the PSC. Contracts should be accurate and reflect what is actually happening in reality. This means that it is likely that each contract to engage a PSC will need to be individually created to make sure that it is accurate for the work that will be carried out by the PSC.
The engaging company will also need to have a Disagreement Process in place and documented to deal with any complaints or challenges regarding the decisions they make in respect of the SDS. This policy will need to be available to all PSCs engaged after 6th April 2021 and will need the contact details of the person(s) responsible for handling the disputes.
