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Impact of changes to the IR35 legislation on the private sector

The rules that apply to ‘off payroll’ workers will change for medium and large-sized businesses from April 2021. This change was originally due to come in from April 2020 but was delayed in response to Coronavirus.

Historically, the PAYE and NIC burden for off payroll workers (‘workers’) such as contractors and freelancers providing services through a personal service company (PSC) or other intermediary has rested with the PSC. However, this historical position is changing from April 2021.

While the aims of the changes are quite straightforward, they could have a significant impact for those affected. In a significant policy shift, the new legislation will place the employment tax compliance burden on the businesses which engage the workers. In practice, this could:

  1. increase the costs faced by businesses
  2. increase the compliance risks faced by businesses, and
  3. potentially reduce the availability of skilled contractors
In a significant policy shift, the new legislation will place the employment tax compliance burden on the businesses which engage the workers.

The core changes

The core changes that will be introduced from April 2021 are:

  • Private sector businesses will be responsible for assessing workers’ ‘deemed employment’ status from April 2021. This shifts the responsibility from workers who have been responsible since initial restrictions (known as IR35) were first introduced 20 years ago.
  • When assessing a worker’s status, businesses must complete a status determination which must be given to both the worker and any party with which they are engaging.
  • The legislation includes a new ‘client-led status disagreement process’ – placing a duty on businesses – to make sure that they are assessing workers on a case-by-case basis in a structured, coherent and correct manner.
  • The legislation also contains provisions allowing for the transfer of the liability through the wider labour supply chain. Businesses affected by these changes should therefore look to understand the overall agency/contractual arrangement for their workers from a diligence perspective.
  • Small companies as defined by the Companies Act 2006 are exempt from the new legislation. The definition of a small company is a company that doesn’t exceed two of the following three criteria:
    • a turnover of under £10.2m per annum
    • aggregate assets on the balance sheet of under £5.1m, and
    • not more than 50 employees

However, small subsidiaries of larger groups would still be caught by the legislation if the overall group they belong to exceeds the above criteria. This includes international groups. The term ‘companies’ includes LLPs, unregistered companies, overseas companies and limited companies.

Unincorporated businesses will only need to consider the turnover test to establish whether they are small.

Businesses have only a limited period to start preparing for these changes.

What does this mean for businesses?

Businesses have only a limited period to start preparing for these changes. There are not expected to be any further delays to the introduction of the new legislations so it is important for businesses to consider the impact of the changes on their ‘workforce’ and understand:

  • which workers are likely to be impacted by the change
  • how staff are trained to do the appropriate assessments of status recognising that the issue of employment versus self-employment is an innately complex area requiring proper review and assessment
  • what changes the company may need to make to its positioning as a deemed employer, to ensure that it has access to the required skills and expertise
  • how it will monitor the ‘wider labour supply chain’, if it is using other agencies and companies on a sub-contracted basis.

How can Blick Rothenberg help?

We are experienced at working with companies as they look to grow and develop. As such, we can:

  • help businesses understand if the rules apply to them
  • ensure that key staff (e.g. in finance, payroll, HR) are trained on the regulations
  • provide tools for employers to make the correct assessment re deemed employers
  • act as an external specialist and advisor in the more complex cases, and
  • ensure that the risks that arise from a deemed employment perspective in ‘due diligence’ situations (e.g. on acquiring a smaller company) are proactively reviewed.

If you have questions or concerns, then please get in touch with your usual Blick Rothenberg contact or one of the individuals on this page who will be able to assist you further.