New IR35 tax rules have come into force for individuals who provide their personal services via an ‘intermediary’ to a medium or large business. The new rules apply to payments made for services provided on or after 6 April 2021.
The off-payroll working rules apply where an individual (the worker) provides their services through an intermediary (typically a personal service company) to another person or entity (the client). The client will be required to make
a determination of a worker’s status and communicate that determination. In addition, the fee-payer (usually the organisation paying the worker’s personal service company) will need to make deductions for income tax and NICs and pay any employer NICs.
The legislation uses an existing statutory definition within the Companies Act of a ‘small company’
to exempt small businesses from the new rules.
A small company is one which meets two of these criteria:
- A turnover of £10.2 million or less
- Having £5.1 million on the balance sheet or less
- Having 50 or fewer employees
If the business receiving the work of the individual is not a company, it is only the turnover test that will apply.
Under the new rules, it is for the “client” ie the company engaging with the “contractor” to make a determination whether the contract is caught by the new IR35 rules. The whole of the tax risk of getting it wrong sits with the “client” and in most of the cases we have seen, the determination is now almost always that IR35 does now apply and deductions for income tax and employee’s and employers’s NICs have to be made.
The Status Determination Statement (SDS) is a key part of the status determination procedure. The client must provide the SDS to the worker and should include not only the decision of the client but also the reasons underpinning it. The client must take ‘reasonable care’ in coming to its conclusion. If it doesn’t, the statement is not a valid SDS. That said, there is no real route for the contractor to appeal if they disagree.
In many ways, the new rules may effectively see the end of small contractor companies, effectively wiping out the tax advantages to the contractor, which was always the Government’s intention. It may in certain circumstances still be worthwhile a contractor using a limited company and we will be writing in this in a follow up post.