How will IR35 changes affect contractors post April 2020?

Updated: 8th January 2021

Impact of IR35 off-payroll rules reform on contractors after April 2021

The new IR35 rules that come into effect from April 2021, originally 2020, will change the way in which contractor status is determined when working with medium and large organisations in the private sector.

New legislation transfers responsibility away from the contractor, and is designed to reduce the number of cases of disguised employment in the UK. HMRC are also trying to prevent contractors working via Personal Service Companies (PSCs) from gaining an unfair tax advantage over employees of their end-clients.

Small private sector businesses are not affected by the IR35 changes, and contractors/PSCs will continue to determine their own employment status when working with smaller organisations.

Where a contractor is deemed to be operating inside IR35, whoever pays the contractor’s fees will also be responsible for paying any tax and National Insurance Contributions (NICs) that become due. This includes paying the relevant employer NICs.

So how will these reforms to IR35 legislation affect contractors from April 2021?

Impact of the new IR35 rules

The new rules for off-payroll working will affect contractors operating via Personal Services Companies, recruitment agencies, and medium to large end-client organisations in the private sector.

Small businesses in the private sector are currently exempt - by Companies Act definition these are limited companies with:

  • 50 employees or fewer
  • An annual turnover of £10.2 million or less
  • A balance sheet of £5.1 million or less

If an end-client meets two or more of the above criteria, the new regulations do not apply and contractor status continues to be determined by the PSC. The new rules are applicable to all companies operating in the public sector, however, regardless of size.

Other changes to IR35 legislation

IR35 Status Determination Statement (SDS)

The contractor’s end-client must provide a Status Determination Statement to the contractor, and also send a copy to the Agency if one is involved.

Status disputes

Responsibility for considering disputes regarding a contractor’s status lies with the end-client who must respond within 45 days with their decision.

Potential to transfer tax liability to a ‘relevant person’

HMRC can recover unpaid tax from another ‘relevant person’ if necessary. This can be anyone involved in paying the Personal Service Company concerned.

No 5% Administration Allowance

As responsibility for determining contractor employment status no longer lies with the contractor for medium and large organisations in the private sector, the 5% administration allowance has been withdrawn in these instances. It remains in place when working with smaller businesses as defined above.

Potential effect of the IR35 changes on contractors

  • There is potential for contractors to receive large historic tax bills if HMRC review previous employment status decisions made by their Personal Service Company. This could create severe financial difficulties, as HMRC are known for relentlessly pursuing non-payment of tax, even in non-standard circumstances such as these.
  • The tool used to determine contractor employment status - the Check of Employment Status Tool, or CEST – has been widely criticised for its error rate and unpredictability. HMRC intend to improve the online tool, but this does not change the fact it may already have been instrumental in making incorrect status decisions in the past.
  • Passing responsibility to their end-client reduces contractors’ control over their own working and financial lives.

For more information on off-payroll working and the changes to IR35 legislation, please contact one of our licensed insolvency practitioners at Begbies Traynor. We’re the UK’s largest professional services consultancy and will advise on how the new rules and regulations affect you as a contractor.

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