Employers that engage consultants or contractors now need to determine whether the consultant or contractor falls inside or outside of IR35 by assessing the employment status of workers.
IR35 off-payroll rules changed on 6 April 2021, extending to the private sector. The new rules apply to payments made to intermediaries such as Personal Service Companies (PSC).
An employer must consider a number of factors and issue a Status Determination Status (SDS) outlining the decision they’ve made. This blog will outline what employers have to take into consideration when making a status determination.
What should I be aware of as a business owner?
If you own a medium or large business that engages contractors and consultants you should be aware of the following:
- It is your responsibility to decide the employment status of contractors you engage.
- If you believe the contractor should be considered an employee, the contractor is now responsible for tax deductions and national insurance contributions (NIC).
- If you decide to classify a contractor as an employee but HM Revenue and Customs (HMRC) investigates and decides this is the wrong conclusion you will be directly liable to pay tax and NIC.
How do I decide the employment status of a worker?
If IR35 rules now apply to your business you should take a cautious approach when making a status determination to avoid penalties from HMRC. You must create an SDS and give this to the contractor, detailing your reasons for reaching your conclusion. When reaching this conclusion you should use HMRC’s CEST tool to make a decision and take into account a variety of factors that determine a worker’s employment status. These factors include but are not limited to:
Supervision, Direction & Control
Consider the degree of supervision, direction and control you have over how the contractor completes their work. If you have a lot of control over the work the contractor does this suggests there is an employer/employee relationship.
If the contractor has to do the work themselves and cannot substitute somebody to do the work, this suggests the worker is likely to be considered an employee.
If the contractor is taking financial risks when doing their work this would suggest they are in fact self-employed and not an employee.
If contractors can be required to wear a uniform, use company equipment or receive employee benefits this suggests they fall inside IR35 and should be considered employees.
Mutuality of Obligation
This is when you are obliged to provide paid work and the contractor is obliged to accept and complete the work. If this situation exists then the relationship between you and the contractor is likely to be considered employment, falling inside IR35.
Read our legal guide on IR35 status determination to find out other factors employers need to take into consideration.
As a contractor or consultant, can I challenge the status determination?
If a client has assessed your employment status and determines that you are in fact considered an employee according to IR35 rules, you can challenge this but it might be difficult to do so.
If you receive the SDS from the client and you are not satisfied with the outcome, before the first payment or deduction under IR35 is made, you can send the document to your accountant who can carry out a review. The client has to have processes in place to review a disagreement arising from the status determination. Ultimately, if you do challenge the SDS outcome, the client will assess the SDS and if it has not changed, the client will provide a written response detailing why the SDS is correct.
What to do if you are a business and have contractors working via a PSC
The new rules may not apply to certain businesses as they are targeted towards medium and large private sector clients and any company (irrespective of size) connected with a public sector organisation. If your business falls within the scope you should:
- Conduct internal training so that all members working in compliance are aware of the rules.
- Review, amend and reissue new contracts, if necessary, to allow deductions for PAYE.
- Implement policies and procedures set out to address status determinations