IR35: Are you ready for the end of "light-touch" enforcement in April 2022?
The reformed IR35 rules have applied to the private sector since 6 April 2021, having been in force in the public sector since 2017. Employers should be aware that HMRC's approach to enforcing the rules is set to change from April 2022.
The IR35 rules apply where an organisation (the client) engages a contractor through an intermediary, such as a personal services company (known as "off-payroll working").
The effect of the rules is that the client is responsible for assessing whether the contractor would have had employment status for tax purposes had they been hired directly.
If they would have been an employee, tax and national insurance contributions (NICs) must be deducted from their fees. The party that pays the contractor's fees will be responsible for deducting tax and NICs, paying employer NICs and, if it applies, paying the apprenticeship levy. This will generally either be the client or an agency.
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What is changing in April 2022?
On the extension of the rules to the private sector, HMRC stated that it would initially apply a "light-touch" approach to issuing penalties for non-compliance.
HMRC's position was that it would not impose penalties for inaccuracies in the first 12 months of the operation of the new rules, from April 2021, unless it had evidence of deliberate non-compliance. Instead, where a mistake is identified, as long as the organisation had taken reasonable care to apply the rules, HMRC said it would take a "supportive" approach and encourage organisations to self-correct any errors.
This did not mean that employers could relax for the first year of IR35. Even though they may not have been subject to penalties, any failure to comply with the rules could still result in liability for unpaid tax and NICs, which could be of greater financial significance than any penalties.
Nevertheless, the increased possibility of enforcement action should be a reminder to organisations to review their IR35 arrangements and check that they are compliant.
- What are the potential consequences if an organisation fails to use reasonable care when applying the IR35 rules?
Key steps to IR35 compliance
To comply with the IR35 rules, the client must carry out a status determination, to assess the contractor's employment status for tax purposes. It must exercise reasonable care when carrying out the determination.
HMRC provides an online tool, CEST, for carrying out an assessment. HMRC will stand by the outcome produced by CEST, as long as it is based on accurate information and has been used in line with the relevant guidance. However, the tool does not always produce a definitive result, and organisations can choose to carry out an assessment without using it.
The client must then provide the contractor (and possibly other parties) with a status determination statement (SDS).
If the client fails to comply with these steps, it will be responsible for deducting tax and NICs from the contractor's fees and for paying employer NICs and the apprenticeship levy if due, until it issues a valid SDS.
- Under the IR35 rules, does an organisation have to provide a status determination statement to all the contractors it engages?
- What can an organisation do if the CEST tool gives an undetermined result for an IR35 assessment?
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Review your compliance processes
With the IR35 rules having been in place for a year, you should review your organisation's arrangements for carrying out assessments, issuing statements and dealing with any challenges.
It is important to have processes in place to review status determinations for longer engagements, or where contracts have been extended, to make sure that they have not been affected by any changes to the working relationship.
In the public sector, while the IR35 rules have been in place since April 2017, some procedural requirements did not apply prior to April 2021, for example the requirement to provide an SDS to the individual contractor and to have a dispute process in place.
- When should an organisation carry out a status assessment for a contractor under the IR35 rules?
- Is employing contractors on fixed-term contracts a solution for ensuring compliance with the IR35 rules?
Check if your organisation is within the scope of the rules
In the private sector, there is an exemption meaning that the IR35 rules do not apply to small businesses. The test for this is based on the organisation's turnover, balance sheet total and number of employees.
Small not-for-profit organisations are also exempt, depending on their turnover.
If your organisation was on the borderline between small and medium in the previous financial year, or if it has undergone significant changes in size or financial performance, it may have moved into or out of the scope of the rules.