HMRC Clarifies Parameters for Off-Payroll Rules
HMRC Clarifies IR35 Regulations
HMRC recently republished a briefing to clarify that the new IR35 legislation is driven by date of performance of services, NOT date of payment.
With the IR35 (off-payroll) reforms just around the corner, both agencies and contractors need to understand when the rules will apply and how to manage them compliantly.
Since there has been a lot of controversy and confusion around the implementation of the reforms in the private sector, HMRC has recently republished an announcement to clarify one important clause in the upcoming legislation.
What happened last time?
In 2017, when similar off-payroll changes were made in the public sector, many agencies offered to reduce the payment terms for PSCs (Personal Service Companies) who they were engaged with, if the engagements with those PSCs was concluded by the end user to be ‘inside’ IR35, in return for an early settlement discount or administration charge. Once agencies made these offers, they would then ensure that PSCs received payment before 6th April 2017 (the beginning of the new tax year and implementation of the reforms in the Public Sector) to avoid payments being subject to tax and national insurance deductions, if they were for ‘inside’ IR35 assignments. If contractors weren’t paid early, and if the end user deemed the assignment to be ‘inside’ IR35, then for all payments made from 6th April 2017 onwards, PSCs had to be paid with tax and national insurance deducted – no matter when the work was carried out.
For the roll-out of the 2021 off-payroll reforms (due April 6th 2021), it will be the date of performance of work which decides whether the new rules apply or not, rather than the date of payment. This means that agencies should be less likely to need to, or be asked to alter payment terms with PSCs as we approach April.
Of course, it remains important that clients consider the agreed payment terms. However, this need is now less critical than before because the new legislation will be driven by the date of performance of services, rather than the date that the payment is made.
Nevertheless, it is important to remember that when a client is considering changes to the contractual terms for some or all their engagements, they must also think of the contractual notice periods required by all parties in the supply chain – not just the implementation date of the reforms.
How does this deadline work in practice?
This clause allows contractors to continue working ‘outside’ IR35 right up until the implementation of the reforms.
Looking at a relatively straight forward example, if a client had 30-day payment terms and a contractual notice period of 30 days, which was detailed in the terms between every party in the supply chain, then to be prepared for April 6th 2021:
- The client would need to give the agency notice on Friday 5th March 2021
- The agency must provide notice to the PSC on the same day (Friday 5th March 2021)
- The last day of PSC services under the agreements would be Monday 5th April 2021 (Easter Monday)
- The payment for those services (if invoiced immediately) would be made to the PSC on Wednesday 5th May 2021.
New clarity provided by HMRC means that for the 2021 roll-out of the off-payroll reforms in the private sector, the date of performance of work is the deciding factor.
While this means PSCs can continue working this way right up to the deadline, it’s important to remember that if an assignment’s status changes (i.e. from ‘outside’ to ‘inside’ IR35), but the client wishes to continue engaging the contractor’s services, new contracts and rates must be agreed to reflect the contractor’s new employment status. And, if contracts and rates are adjusted as a result of IR35, then the contractual notice periods must be factored in to allow enough time for any necessary amendments to take place.
How we can help
We understand that this can be very confusing and difficult to understand. Whether you’re an agency or contractor, if you have any questions about the upcoming legislation changes or how they will impact you, then please get in touch on 01923 257257. We’ll be happy to help you.