What is IR35?
IR35 is another name for the off-payroll working rules, which are designed to combat tax avoidance by consultants (also referred to as ‘workers’) that provide their services to clients via an intermediary such as a limited company, but who would be considered an employee if the intermediary was not present.
Consultants who work through their own limited company benefit from a certain level of tax efficiency by working as though they are self-employed. Some genuinely are self-employed, but others are not. The IR35 rules tackle disguised employment and remedy the tax discrepancies by taxing the receipts from those engagements as though they were employment income.
Why is this relevant to my firm?
Many law firms engage with consultants to some degree, to allow for flexibility. This may be on a short or long term basis, for example, to cover staff shortages. Some firms simply prefer this operating model, with consultants managing their own workloads and having the responsibility of winning new work.
This situation can also arise when a firm merges with another, or as part of succession planning; retiring partners may stay on with a firm for a number of years, on a consultant basis, to help ‘smooth’ the transition.
From 6 April 2021, if you engage with consultants, and your firm is medium or large in size, you are responsible for assessing whether IR35 rules should apply to payments made to them. If the rules do apply, you will need to make deductions for tax and NIC from any payments made to them for services provided post 6 April 2021.
If you firm is small in size, the onus for making this assessment and applying IR35 remains with the consultant themselves.
What size is my firm?
The criteria for determining whether a firm is medium or large sized is based on the corporate tax rules for company size. A firm will be classed as medium or large if it satisfies any two of the following criteria:
- Fee income of more than £10.2 million
- Balance sheet total (meaning the total of fixed and current assets) of more than £5.1 million
- 50 or more employees
My firm is medium or large, so what do I need to do?
- Identify consultants operating through an intermediary.
- Review each engagement separately, using HMRC’s ‘Check Employment Status for Tax’ (CEST) tool to assist with your determination.
- Confirm the IR35 status of each engagement by providing a Status Determination Statement (SDS) prior to commencement of the engagement.
- Ensure the SDS is provided to all parties in the labour supply chain.
- Provide details of a dispute resolution process, so that contractors can appeal against any determination if they disagree with it.
- If consultants appeal, you have 45 days to respond.
- Where IR35 applies, you must make deductions for PAYE and NIC from the payments made to the consultant.
How do I make deductions for PAYE and NIC?
You will need to add the consultants to your payroll. This does not make them an employee, so it does not mean they are entitled to holiday/sick pay, etc. You will need to ensure they are identified separately as workers (this is usually just a tick box on your payroll software).
All consultants caught by IR35 will need to complete a new starter form, so that you receive the appropriate tax code, otherwise you will need to operate PAYE using an emergency tax code.
Do I have to assess every consultant?
Yes. You are obliged to determine the employment status of every worker operating through their own intermediary, even if they are provided through an agency.
What is an intermediary?
This will usually be the worker’s own personal service company (PSC).
Does IR35 apply to individuals?
IR35 legislation only applies to intermediaries such as limited companies and partnerships; however, employment status is also an issue for individuals working under their own name, and should not be overlooked by end-user clients.
You are obliged to assess their employment status in much the same way, and would remain liable for any tax and NIC if the nature of their engagement was akin to an employment relationship.
Status determination statement (SDS)
There is no HMRC approved format for an SDS, but as a minimum it should include the following:
- Reference to the contract to which the determination relates.
- Status determination (i.e. within IR35 / outside of IR35)
- Brief details as to why you have made the determination
- Appropriate contact details to enable contractors to make an appeal against the decision if they so wish.
You must ensure that the SDS is provided to both the worker and the party contracted with for the supply of the worker (usually the worker’s personal service company, but this could also be an agency, umbrella company or other intermediary).
Where there is a labour supply chain involved, the determination must be passed down each stage of the chain until it reaches the fee-payer. If this does not happen, the end-user could become unnecessarily liable for any tax and NIC.
SDS appeals process
The status of a worker is not always straightforward, and a number of factors will need to be considered. The business is obliged to review each engagement on a case-by-case basis, and be able to demonstrate that reasonable care has been taken when making the determination.
It is important to be aware that workers may not always agree with the determination made (as it makes life more complicated for them), so be prepared for it to be contested.
There is no formal process set out by HMRC to appeal a SDS, but it is recommended that you implement one to deal with contractors who might wish to contest the determination.
- You must provide consultants with contact details to make any appeal.
- You must respond to any appeal within 45 days.
We also recommend that you encourage the consultant to complete the CEST questions on the HMRC toolkit from their perspective. You can then use those results during the review and any subsequent discussions; or it may help the consultant to understand how you have made the determination.
What penalties are there for non-compliance?
If HMRC were to enquire, and the engagement found to be within the scope of IR35, you will have to pay the tax and NIC due on these amounts, as well as any interest.Any penalties levied will be based on a percentage of the tax and NIC lost.
HMRC have said that, in the first 12 months, there will be a ‘light touch’ to penalties for any inaccuracies identified, unless there is evidence of deliberate non-compliance.At present, there are no penalties for non-compliance with regards to the SDS process, but if you have not undertaken this step, and tax and NIC were subsequently found to be due, you could face maximum penalties. Furthermore, your contractors now have an expectation that you will carry out this process.
Check employment status for tax (CEST)
New Starter Form