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Here in the Flexible services team, we’ve been busy reading ourselves for the upcoming changes to the off payroll working rules (commonly known as “IR35”). The changes are due to come in to force in the UK, on Tuesday 6th April 2021, having been delayed from April last year due to the pandemic.
What is “IR35”?
IR35 is anti-avoidance tax legislation which has been in place since 2000, and sets the rules for how much tax contractors working through personal service companies (PSCs) must pay. The rules are designed to tackle what HMRC call ‘disguised employment’. To quote HMRC: “The off-payroll working rules (commonly known as IR35) ensure that individuals who work like employees pay broadly the same income tax and national insurance contributions (NICs) as employees, regardless of the structure they work through.”
What is changing?
Currently, where the end client (in receipt of the contractor’s services) is in the private sector, responsibility for ensuring compliance with the IR35 rules sits with the PSC. However it is HMRC’s view that many PSCs are not managing their IR35 obligations properly, meaning HMRC is suffering a tax shortfall.
Therefore from 6th April 2021, new tax rules come in to force which:
(i) shift the responsibility for determining the employment status for tax purposes of off-payroll workers from the individuals themselves to the end client. Therefore making the end client liable to determine if the IR35 rules apply;
(ii) impose payroll obligations on the business that is paying the worker (or the worker’s PSC or other intermediary). Therefore where an engagement falls within IR35, the liability to operate PAYE and pay employer’s NICs will sit with the entity that pays the PSC.
These changes bring the private sector in to line with the tax rules for off-payroll workers in the public sector, introduced in April 2017.
What do the changes mean?
It is important to note that, whilst the tax rules are changing, the tests for determining employment status for tax purposes remain the same. It’s not the way in which IR35 is assessed that is changing. It is simply a shift of the obligations to make that assessment and remit the tax which moves away from the PSC.
From 6th April 2021, where an end client determines IR35 applies to a particular arrangement, the new rules will require that payroll taxes and NICs be deducted at source from the fees paid to a PSC.
For Vario assignments, the obligation to make those deductions will sit with Pinsent Masons.
HMRC have designed an online assessment tool referred to as CEST (Check Employment Status for Tax).
How is the Vario business getting ready for the changes?
The Vario business and Pinsent Masons more widely have been taking steps to get ahead of the changes. We’ve set up a project group comprising Pinsent Masons’ tax specialists and have sought input from industry IR35 advisers, and are working through the implications of the changes for our Varios, our clients and the legal freelance market more generally.
Preparations are well advanced, we are also undertaking a full review of our Vario engagement models to ensure that we are as well placed as possible to support our Varios, and clients, when the changes hit.
Varios who operate via a PSC and are currently on assignment will hear from their account manager very soon if they haven’t already been in touch to talk about what these changes mean for you.
How will the changes impact me?
Whilst this is a significant piece of legislation for contingent workers across all markets and sectors, it is worth bearing in mind this will merely impact the tax applied to income. Experience of the IR35 legislation being introduced in 2000 suggests that once the sector adjusts to the new requirements, it will continue to flourish in the new climate.
The new rules won’t prevent freelance contractors from continuing to operating through PSCs, although one consequence of the changes may be an increase in the use of alternative PAYE engagement models.
As previously reported in the press some large businesses and organisations have announced policy-based decisions not to continue to engage contractors through PSCs but on a PAYE basis only. We are in separate contact with our Varios directly affected by these recent announcements, to provide guidance around alternative Vario engagement models. However current industry intelligence does not anticipate this to be representative of the typical market response, with other businesses recognising the continued flexibility and savings when compliantly engaging contractors through PSCs.
Until 6th April 2021, IR35 compliance remains the obligation of the PSC until the changes come in to force, so if you are in any doubt as to the impact of IR35 on your current or future tax position, we strongly recommend you seek independent advice from your accountant.
Further updates will follow from us to help you navigate the changes. Rest assured Vario is very well-positioned to continue to support you and your freelance legal career!
For further information on Vario’s PAYE engagement models or questions about the upcoming changes, please do not hesitate to e-mail us at VarioIR35@pinsentmasons.com or speak to your usual Vario team contact.
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