IR35 – When Are You Impacted?
When Does IR35 Impact You?
Here, Chris James, Director of Accountancy Services at JSA, clarifies how to know when you’re impacted by the IR35 reforms and when you’re liable to ensure you’re always acting compliantly.
The implementation of the IR35 reforms had a deep impact on the temporary recruitment sector this Spring, with many contractors left with no choice but to work ‘inside’ IR35 or take permanent employment as a result of the actions of some end hirers who implemented blanket bans amid the confusion to protect themselves from financial liability. Although many contractors and hirers are troubled by the shift in responsibility, there are still many situations in which the new IR35 reforms DO NOT apply, allowing hirers to work with PSC contractors with minimal risk and contractors the chance to challenge unnecessary blanket bans or misunderstandings, accessing more compliantly ‘outside’ roles.
When the IR35 reforms were implemented in the private sector in April 2021, many recruitment agencies and end hirers feared the potential additional financial liability associated with working with limited company contractors. Although HMRC assured the temporary employment sector that most contractors would remain legitimately ‘outside’ IR35, many end hirers anxiously implemented blanket bans, ceasing their engagement with PSCs altogether to avoid any associated risk. These bans could have been avoided and should be reversed. Since, if certain conditions are met, the reforms don’t apply, meaning the end hirer is not responsible for determining the SDS and the associated risks – this responsibility remains with the contractor, as it did before April 2021.
Therefore, wherever you stand in the supply chain, you must know who is responsible for determining the SDS to ensure you do your due diligence, act compliantly, and protect yourself from financial penalties. In fact, understanding when the responsibility falls to you, the contractor, could enable you to take on more ‘outside’ contracts compliantly since your end hirer won’t fear the potential liability with HMRC.
What changed in April 2021?
In 2000, the UK Government introduced the ‘Intermediaries Legislation’, known as “IR35” to regulate payments made in connection with services provided through an intermediary (such as a personal service company). This regulation instructed contractors to carry out an assessment of their employment status when taking on a new assignment to establish whether they’re legitimately working as self-employed or if their working practices would be considered employee-like if they were to remove their limited company as an intermediary. These requirements were subsequently included in Chapter 8 of ITEPA (sometimes referred to as the “old” IR35 rules).
In 2017, ITEPA was updated to introduce a new Chapter 10, directed at the public sector only, shifting the responsibility for determining a contractor’s employment status on each assignment from the worker to the end hirer.
In April 2021, Chapter 10 of ITEPA was updated again to incorporate private sector end clients, following the same exemptions as the public sector. (This is what has been referred to recently as the IR35 reforms or the “new” IR35.)
Under this final (for now) iteration of the rules, the private sector end hirer has to determine status as in the public sector, unless one of two exemptions applies:
- The end hirer is considered “small”.
- The end hirer is overseas.
If the end hirer is exempt for either reason, the Chapter 8 rules apply, as before, and the contractor remains responsible for determining their employment status and paying tax correctly.
Although sometimes called the “old” and “new” IR35 rules, both Chapter 8 and Chapter 10 rules exist simultaneously as discreet pieces of legislation, meaning you either fall under one or the other depending on your end hirer’s size and location. If your end hirer is “small” or “overseas”, you are responsible for your SDS and tax payments under Chapter 8, otherwise, this falls to the agency/end hirer under Chapter 10.
The Small Company Exemption
When is an end hirer “small”?
In recent research, we’ve found almost 20% of hiring organisations are not responsible for producing an SDS due to the “small company exemption.”
Your end hirer is considered “small” if they meet all these criteria:
- Annual turnover up to £10.2million
- Assets listed on their balance sheet up to £5.1million
- 50 employees or less.
If this is the case, then Chapter 8 applies, and you (the contractor) are responsible for determining your employment status as you were before April 2021.
However, if your end hirer breaches even one of these criteria, they are no longer considered “small” and the liability for your SDS falls to them and the recruitment agency under Chapter 10 of the legislation.
How to know if your end hirer is “small”?
We advise all contractors to ask your end hirer if they fall under the “small company exemption” before you start working with them, since this will have a big impact on how both parties prepare for the role. Your end hirer must confirm their size (if you request it) in terms of whether they are, or are not small for the purposes of the off-payroll legislation.
If your end client doesn’t know if they’re considered “small” or won’t provide confirmation, this could be a warning sign that they’re not acting compliantly, so you must press for an answer to prove you’ve done your due diligence to HMRC. Under the off-payroll rules, an end hirer must respond to a request within 45 days.
It’s important to note that if you’re working for a small sub-company within a group of companies, it’s the group’s size that takes precedent, so the sub-company may not fall within the “small company exemption”, even if alone, it would. And remember, it’s the size and location of your end hirer that matters – not your recruitment agency.
What if their size changes?
Since businesses aren’t static, your end hirer’s size may change while you’re working with them. HMRC has made allowances for this situation, stating within the rules that the company’s size is determined by the accounts they file in the previous tax year. Therefore, if a company grows or downsizes while you’re working with them, this change won’t impact the supply chain immediately. It would only apply at the beginning of the following tax year.
Therefore, it’s important to re-confirm the size of your end client before April 5th each year to ensure it hasn’t changed and the responsibility for conducting a status assessment hasn’t switched in either direction. If it has switched, we advise you to speak with your end client to ensure you both act compliantly.
The Overseas Exemption
What if your end hirer is “overseas”?
If your end hirer is overseas, then the IR35 reforms (Chapter 10) don’t apply since the end hirer is not governed by UK tax law. If this is the case, it is your responsibility as an individual with a UK tax residency, working through an intermediary (your own PSC), to conduct your own status assessment and ensure you pay the correct tax to HMRC.
How to know if your end hirer is “overseas”
Your end hirer falls into the “overseas exemption” providing they have no permanent UK connection, such as an office in the UK or a permanent employee living in the UK.
As soon as the end hirer makes a permanent UK connection, they are no longer considered an overseas company, so the liability for your SDS falls to them and Chapter 10 of the IR35 rules apply. Also, be aware that an overseas company that is in a group with a footprint in the UK is unlikely to qualify as “overseas” – HMRC would look to the UK group member to comply with the new rules, even if a different group company engaged the contractor.
When you’re self-employed, you must take all the necessary measures to act compliantly and pay the correct tax or you could face financial liability. This means you should always be aware of the size and location of your end hirer, so you know which set of regulations apply to your work. Every time your contract changes (whether you’ve got a new assignment or renewed terms of an existing contract) and at the beginning of a new tax year, you must confirm which party in the supply chain is responsible for conducting the SDS and verify your self-employment status to ensure you’re still acting compliantly.
If you’re acting under Chapter 8 (status assessment is your responsibility) – you must have your own contract assessed with a reliable platform (such as IR35 Complete™) and you may be able to take insurance cover to protect your position if you wish.
If you’re acting under Chapter 10 (status assessment and the SDS is your client’s responsibility) – you may wish to have your own status assessed anyway to ensure you’re acting correctly, especially if you’re unsure of the size/location of your end hirer or you haven’t received an SDS. The best thing to do if you’re uncertain is to protect yourself by doing whatever you can to act compliantly.
Here to Help
No matter whether you’re responsible for your own status decisions or if they’re down to your end hirer, you must do your due diligence to ensure you’re acting compliantly. Our experts can provide IR35 advice and contractual reviews alongside compliant IR35 assessments through our market-leading platform, IR35 Complete™, to make sure you know where you stand. Plus, getting assessed and understanding when the new rules apply to you could help you maximise your opportunities to work ‘outside’ IR35 compliantly.
This is an extract from a recent webinar in partnership with IPSE’s Andy Chamberlain. As a contractor with JSA, you can benefit from an exclusive discount on IPSE PLUS membership, meaning you can access upcoming webinars and exclusive replays alongside all their great benefits at little cost. Get in touch with your account manager to access this discount or, if you’re new to JSA, click here to explore our contractor accountancy services.