Business Tax: Off-Payroll Working (IR35)

Despite opposition, UK medium and large private sector companies are set to become responsible for setting the tax status of any contractor they use from April 2021.

IR35 off-payroll working rules were originally introduced in 2000 as an anti-tax avoidance measure which applied to contractors who fell outside of the HM Revenue & Customs (HMRC) definition of self-employed. The rules were then changed in 2017 for public sector organisations and are now due to impact medium and large private sector companies.

As highlighted in our March update, the proposed extension to IR35 (see our original article covering changes to using contractors in the UK) was postponed from April 2020 to April 2021 in light of the coronavirus pandemic. From April 2021, UK medium and large private sector companies will become responsible for setting the tax status of any contractor they use. It has caused some controversy since it was announced and anti-IR35 lobbyists have argued that the new rules are flawed.

The House of Lords Economic Committee (HLEC) carried out a review of the proposed extension and concluded that while it supports IR35's original aims of trying to create greater fairness in respect of tax, the proposed extension to IR35 treats contractors as employees for tax purposes but does not permit them the same rights as employees. The HLEC argues that treating a contractor as an employee for tax purposes can only apply where the contractor has employment rights and 'risk sharing' between the employer and contractor.

The review determined that the complexity of the rules and limitations of HMRC's Check Employment Status for Tax (CEST) tool mean companies will find it difficult to determine a contractor's tax position and is therefore not fit for purpose.

The Government Will Proceed Regardless

Draft legislation dealing with off-payroll working rules in the private sector from April 2021 has been added to the Finance Bill 2020, despite the recent conclusions reached by the HLEC.

The draft rules are largely the same as those included in the original draft Finance Bill in July 2019, with the exception of some small clarifications regarding:

  • the requirement for an end client to have a UK connection in order for the rules to apply; and
  • the legal obligation for end clients to provide 'status determination' statements to workers if they request them.

We will endeavour to keep you updated on new developments in relation to IR35 as they become available; however, if you would like more information about how the off-payroll working rules legislation coming into force from April 2021 could affect your company, please contact:

Tim Baker
Tel: +44 (0)20 3667 5971

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