How will taxation reforms of consultants (IR35) affect SMEs?

How will taxation reforms of consultants (IR35) affect SMEs?

New ‘off payroll’ rules will apply from April 2021.

Changes to the IR35 off-payroll working rules in the private sector originally scheduled for April 2020 were delayed but will now take effect from 6 April 2021.

As a result, the IR35 tax rules that apply to consultants working in the private sector through intermediaries such as personal services companies will change from the new tax year (2021).

The reforms will mean that the qualifying business using such consultants will have new responsibilities for the administration of HMRC related payments and may incur additional costs.

What is changing with IR35?

In summary, where the new IR35 rules apply it will be the responsibility of the end-user client to deduct PAYE and employee National Insurance contributions for the consultant and to pay employer National Insurance contributions on the consultancy fee.

Why is this happening?

The changes will make it more likely that personal services company arrangements are not inappropriately reducing the tax and NI liabilities for both the individual and client in circumstances where the consultant could effectively be operating as an employee.

These changes have already been implemented in the public sector.

What happens now?

Under the current IR35 rules, where a consultant is engaged through an intermediary (such as the consultant’s own personal service company), the intermediary is responsible for deciding what the consultant’s assumed employment status is for tax purposes and – accounting for PAYE/employer National Insurance contributions where this is appropriate.

What will happen under the new IR35 rules?

From 6 April 2021, where the client is affected by the changes in rules and makes the payment to the private services company, the client will be responsible for:

  • deducting income tax and employee National Insurance contributions from the consultancy fee and accounting to HMRC for them;
  • paying employer’s National Insurance contributions on the consultancy fee.

The client of the consultancy service will therefore have to determine each individual consultant’s employment status (for tax purposes). They will then need to let the consultant know the outcome and have a process in place to deal with challenges to the outcome.

Who is affected by the changes in rules?

The new IR35 rules will apply to medium and large companies. Small companies are not affected.

What should businesses do now?

  1. Review all consultancy arrangements to assess whether any would be classed as an employee if they were providing their services directly
  2. Consider whether alternative terms of engagement should apply (if direct employment is an option, employers should be aware of the potential for employment liabilities to accrue, for example, if there is an insufficient break between contracts)
  3. If the consultancy arrangement continues, decide if they will need to review fees, to take account of the additional IR35 tax burden
  4. Talk to the consultant about their findings and their impact on them.

How do you check a consultant’s employment status for tax?

Unfortunately, there’s no easy answer to this, and each case will need to be determined on the specific facts that apply to that consultancy arrangement.  An on-line questionnaire-based tool is available on the UK Government website, Check employment status for tax, although this does not provide a failsafe method of assessment.

Factors that organisations should take into account when considering whether to engage an individual on a consultancy or employment basis include:

  • Will the individual have the right to provide a substitute for their choice?
  • Will they be paid a fixed / regular amount, regardless of delivery?
  • Will the individual be required to accept any work offered to them?
  • Can the individual work elsewhere while working for you? (This may be unlikely if they are contracted to work full-time hours for you.)
  • Does the organisation decide how the work is carried out?
  • Is the organisation obliged to provide a certain amount of work?
  • Does the organisation control the consultant’s attendance, holidays etc?

The more control the client has over the work, the more likely it is that the relationship would be seen as one of employment rather than consultancy.

Consequences for failing to correctly account for tax and National Insurance contributions can be significant, and employers should be taking steps, and if necessary professional advice, before April 2021 to ensure they are not at risk.

HMRC has published new draft guidelines in its Employment Status Manual (ESM) which includes information on how Status Determination Statements (SDS) apply and information on what constitutes ‘reasonable care’ in making an SDS.  Examples of behaviour that would indicate a company has taken reasonable care include seeking professional advice and making a new SDS should the workers working practices change.  Examples of behaviour that would not constitute reasonable care has been taken include determining that every worker who provides their services through an intermediary is caught by the off-payroll rules without any consideration to the specific facts of each individual case.

How can Isosceles help?

  • Review of the working arrangements which you have with your contractors and consultants
  • Review and update contracts with contract workers

Please get in touch if you think we can help