IR35 "Off-payroll" Rules In 2021
New Off-payroll legislation kicks in on the 6th April 2021. Make sure your clients are ready.
Now is the time to take action
HMRC “Off-payroll” legislation for private sector businesses takes effect in April 2021, having been postponed from April 2020. Whilst this is still a few months away, it’s essential that companies using limited company contractors, as well as their accountants and advisors, understand what’s required of them now. Help your clients in staying the right side of the rules.
What is the Off-payroll legislation?
The Off-payroll legislation is said to be a reform of intermediaries legislation, although the two are very separate. The original IR35 legislation that’s been around for some years will still apply as per Chapter 8 of the Income Taxes Earnings and Pensions Act (ITEPA) 2003. It lays out what the tax rules are in regards to limited company contractors that are deemed “employees”.
Under IR35 rules, contractors have always had to work out their own tax status and calculate appropriately what they owe to HMRC. However, under the new Off-payroll legislation, it is the responsibility of the hiring company to pay the extra employment taxes as if the contractor was a company employee.
If these new rules apply to any of your clients, then they need to understand the implications in-depth. If HMRC suspects an assessment is incorrect, it can pursue companies for the backdated tax. Fines and other formal procedures may also follow.
Again, this can’t be overstated - all organisations must understand the fundamental differences between the new legislation and the original IR35 rules. Simply carrying on as before won’t cut it; how HMRC run IR35 cases is now very different to previous years, with the case law having moved on considerably. New compliance strategies implemented by companies will need to be based around a full understanding of how cases are now argued and defended in court.
Non-compliance, and being armed with the facts
As mentioned, any backdated tax will need to be repaid, likely in addition to interest and fines. Unfortunately this has put many companies off using contractors via limited companies, not least because of the extra administration. This is not only bad news for contractors but can have damaging repercussions for the business too.
However, a wealth of information is available on the Gov.uk website, with many firms also seeking specialist help.
Staying compliant into the future
Accurately assessing tax status assessment is just the beginning when it comes to compliance. Furthermore, this on its own doesn’t mean the risk has been entirely mitigated.
IR35 rules make it clear that actual day-to-day working practices and events that took place need to be considered when deciding status. These also must be evidenced correctly so that the decision can be defended later if need be.
It’s clear that the administrative burden is increased for firms that use limited company contractors. However, it’s still important that no corners are cut and record-keeping is top notch. HMRC is well within its rights to retrospectively investigate company tax affairs often up to six years later. This makes retaining evidence all the more important, as any investigation by HMRC can then be closed down quickly.
Insurance alone is not the answer
Many companies take out tax liability insurance and this in itself is often a positive move; indeed it’s advisable. However, it’s worth pointing out to your clients that this alone is no alternative to robust IR35 compliance processes.
Having tax liability insurance does not automatically mean a firm’s responsibilities have been discharged. After all, this type of insurance exists to provide compensation should an unforeseen event or circumstance come about. It’s not designed to offer recompense for poorly considered compliance decisions leading to non-payment of tax that is rightfully owed.
Insurance companies are wise to this too. They will expect claimants to have arrived at their own - correct - decision around IR35 tax status and have applied it accordingly. Insurers are therefore extremely unlikely to pay out if it’s determined that the correct measures have not been taken.
To put this simply, Off-payroll defences must be completely watertight against any HMRC proceedings. Robust compliance-led processes must be outlined and evidenced, with insurance merely being supplementary. As long as a company can prove its methodology and compliance beyond doubt, there are no worries about any nasty tax surprises (not to mention damage to its reputation).
Encourage your clients to act early
April will rattle around fast and firms should be prepared for the new Off-payroll legislation sooner rather than later. If any of your clients - or indeed your own firm - still have preparations to do, then now is time.
If any contracts are still ongoing after the 6th April 2021, they may well attract the attention of HMRC. It’s therefore advisable to only offer very short contracts where possible right now so that there’s time to establish effective compliance processes. Contracts that therefore begin after the 6th April will start afresh under the new rules.
Where can my clients find accurate status determinations?
An excellent place to start is IR35 Shield for Business. It’s an outsourced SaaS solution designed to help hiring organisations make the correct assessment for themselves and minimise risk. There’s a range of guides and information, plus firms can use IR35 Shield’s Collaborative Assessments capabilities to help them accurately assess their situation. There are also some handy video podcasts plus the Shield Passport Process that tells companies exactly what they need to do to prepare for the new Off-payroll working.
This article was put together by the specialist R&D tax and funding experts at Myriad Associates. With bases in both the UK and Dublin, we have helped businesses and accountants across the country achieve the R&D Tax Credits and innovation funding they deserve.
See how your firm can partner with us, and discover more about our team. To discuss anything related to R&D funding, please do call us on 0207 118 6045. There’s also our contact form - we’re working remotely as usual and will be pleased to call you back.