23/03/2021 – IR35 – Off Payroll Working.
New rules from April will extend IR35 to the private sector, meaning that all contractors who provide services to a client through an intermediary will need to have been assessed as to whether they are within IR35. If they are their income must be taxed by the fee payer, if they are outside IR35, and they can (or their intermediary can) continue to manage their own tax affairs.
IR35 has existed for some years within the public sector, this article concerns the private sector.
What is an intermediary?
Normally it will be a limited company owned by the contractor, but it could equally be another person or another company, an agency perhaps.
What is the assessment for?
An assessment is necessary to determine whether the contractor is genuinely a self-employed contractor, or whether they are really a worker. A ‘worker’ is a form of employment status that falls short of being an ‘employee’ but does come with some rights, notably to holiday pay & certain employment laws e.g. minimum wage, working time regulations etc.
Who needs to do the assessment?
This depends on the size of the end-user of the contractor’s services. If the end-user has two of the following attributes:
- has an annual turnover of more than £10.2 million; or
- a balance sheet total of more than £5.1 million; or
- more than 50 employees;
then that end-user will need to carry out the assessment. If one of the above criteria do not apply then the requirement to assess their IR35 status will remain with the intermediary.
For the purposes of this article and the examples below we refer to an organisation meeting any of the above criteria as being a ‘small’ end-user.
Examples – who needs to do the assessment?
- Person A works under a limited Company B and performs services for a large end-user client C. C needs to do the assessment & confirm the outcome to A & B.
- Person A works under a limited Company B and performs services for a smaller end-user client C. B needs to do the assessment & confirm the outcome to A.
- Person A works under a limited Company B which contracts with consultancy company D, who subcontracts A’s services to large end-user client C, for whom A provides services. C needs to do the assessment & confirm the outcome to A & B.
- Person A works under a limited Company B which contracts with consultancy company D, who subcontracts A’s services to small end-user client C, for whom A provides services. B or D need to do the assessment & confirm the outcome to A & B.
How is the assessment done?
The assessment should be done using HRMRC’s Contractor Employment Status Tool (CEST): https://www.gov.uk/guidance/check-employment-status-for-tax.
Once done, the outcome should be confirmed to the intermediary & the contractor in the form of a Status Determination Statement (SDS). A template for this is available from myHRdept. The SDS should provide information on how the Contractor can appeal against the determination if they don’t agree with it.
What if the end-user client doesn’t do the assessment?
If an assessment isn’t done and an SDS isn’t issued, the liability for making the CEST determination passes up the chain. Our understanding of this in the context of the examples above is that in examples 1 & 2 the CEST determination would be completed by B, and in examples 3 & 4, D would be responsible. In both cases B & D must also issue the SDS.
The practical implication of that is that whoever is next in the chain behind the end-user (B or D in our examples) must ensure, and gain evidence for their own records, that the end-user has completed the CEST assessment, and has issued the SDS. If this does not happen, they will need to do it themselves and notify the end-user of the outcome.
What if a contractor disagrees with an SDS?
End-users are required to establish a ‘client led status disagreement process’ under which the end-user should respond to a contractor’s challenge within 45 days of receiving it. The response should include a reconsideration of the CEST determination before issuing a reaffirmation of IR35 status, or confirmation that the original decision has changed, and why.
What needs to be done now?
Anyone who engages a contractor via a limited company from and beyond April 2021 should:
- Establish the ‘chain’ – who is the end-user, the contractor (or ‘Individual’) the personal service company and the Contractor.
- Establish who is responsible for completing the CEST and issuing the SDS.
- Ensure that the CEST and SDS are issued and retain copies.
How long should we keep records?
Self-employed contractors are required to keep records for 5 years, it would seem that this would be a reasonable period to keep CEST determinations and SDS too.
What else do we need to know?
CEST determinations must be carried out with ‘reasonable care.’ Most importantly that will mean accurately representing reality when answering the CEST questionnaire. It is likely that many companies will seek to provide the answers necessary to arrive at an ‘outside of IR35’ conclusion.
There are many relevant factors, but myHRdept’s experience to date is that problem areas arise from substitution, i.e. whether the personal services company (B in our examples) can really send a substitute for the contractor to work with the end user, with the minimum of contractual or other resistance. If end-users can demonstrate that this has actually happened in practice, they will be on strong grounds to defend their findings of ‘outside of IR35,’ subject of course to the rest of the CEST questionnaire pointing to the same conclusion. Where practical examples of substitution don’t exist it will be harder, though not impossible, to show that substitution could happen.
Also worth noting is that blanket CEST assessments should not be used – A CEST determination and SDS need to be completed in respect of each individual contractor.
Lastly, it seems from the wording we have seen that end-users should frequently reassess employment status to reflect changing conditions and the passage of time. While we haven’t seen precise official guidance, myHRdept would suggest that a new CEST determination is carried out:
- in the event of a material change arising from the end-user’s requirements (new assignment or a significant other change) or the contractor’s own arrangements; or
- every 6 months.
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