As is somewhat customary in the ushering in of a new financial year, a raft of employment developments have recently come into effect. These include the usual annual reviews to matters such as national minimum wage rates, and changes to the limits of certain statutory payments (such as redundancy pay for example). One additional, and very noteworthy change that came into force from 6 April 2021, was the implementation of reforms to the IR35 rule on off-payroll working in the private sector – reforms that had previously been delayed by a year as a result of the ongoing Covid-19 pandemic.
Originally introduced back in 2000, the general reasoning for the IR35 regime and its introduction was to discourage independent contractors from the practice of setting up Personal Services Companies (PCS's) as a means to provide services to clients and avoid being regarded as an employee for tax purposes. Accordingly, in circumstances where IR35 applies, workers who would have ordinarily been regarded as an employee were they to provide services directly to an end client (and not through an intermediary), are to be treated as being employees for the purposes of tax. This is the case regardless of any other contractual arrangements that are in place between the parties.
The new reform, effective from 6 April 2021, means that private sector organisations are now subject to the reformed off-payroll IR35 regime, in addition to public sector organisations that have been subject to the rules since 2017 in circumstances where a worker is engaged via an intermediary (such as a PSC). Importantly, private sector organisations are now (subject to the below) deemed to be responsible for determining the employment status of a worker and for making appropriate deductions in respect of tax and National Insurance deductions. Previously, this responsibility rested with the contractor's PSC. Where IR35 applies, the private sector (and public sector) organisation will then be responsible for ensuring the regime is complied with.
One of the caveats to this position is that small businesses are exempt – with the Companies Act 2006 providing the criteria for what constitutes a small business. If an organisation satisfies the criteria, the responsibility for determining IR35 does not shift, and remains with the PSC. The same is true in relation to organisations that do not have a UK connection. Here, the responsibility for ensuring that the IR35 regime is complied with would also remain with the PSC.
In February this year, the Government published a briefing on supporting organisations to comply with the changes to the off-payroll working rules. Within this briefing, the Government states that it will not require organisations to pay penalties for inaccuracies in the first 12 months of the operation of the new rules (regardless of when the inaccuracies are identified). This 12 month "grace period" is however (for good reason) subject to there being any evidence of deliberate non-compliance.
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