How to prepare for 2021 Off-Payroll tax changes 

How to prepare for 2021 off-payroll tax changes 

How contractors can plan for IR35 reform in the private sector

The acceleration of UK Coronavirus cases coincided with the countdown to the off-payroll tax rules roll-out to the private sector, which should have happened on 6th April 2020 in line with the new tax year. 

However, the Government saw sense and took the pragmatic approach to delay the introduction, which has now been proposed for April 2021. Whilst the Government has claimed the policy is deferred and not cancelled, at the time of writing the contentious policy is not yet law because it isn’t currently included in the Finance Bill which is passing through Parliament and yet to reach Royal Ascent. Even if the proposals do reach statute, there is still scope over the next year to persuade policymakers that the draconian tax measure should be abandoned altogether rather than impose costly burdens and exploitative arrangements upon hiring firms and freelancers.  

With the pause button pressed, contractors should take heed from the disastrous dress rehearsal they all experienced earlier this year that saw many of them terminated or treated unfairly. And firms should do the same to avoid their plans being severely disrupted. 

The trigger point for all parties is to ensure that contractors who are likely to be providing services which overlap 6th April 2021 should be dealt with a long time beforehand to avoid disruption. For most firms, this may mean not paying attention to IR35 again until September 2020. For others, with longer-term projects, they should consider waiting until after the Finance Bill reaches Royal Ascent, then plan accordingly.

In the meantime, contractors should be reminded that the original Intermediaries Legislation from April 2000 is still the law to be abided by. Dave Chaplin, author of ‘IR35 and Off-Payroll – Explained’ outlines what all parties can do to hire contractors outside the scope of IR35 now and from April 2021.

The importance of working practices

Working practices are key to determining IR35 status and it’s crucial that the contractor’s working practices are different from an employment relationship. For a hirer, it’s important not to instruct a contractor on how to do their job or what to work on, nor govern the contractor by the rules employees abide by.

It’s also vital for a contractor to demonstrate that they are in business in their own right. Having business cards, a website, personal laptop and home office can be useful pointers to self-employment, but they are secondary factors. Having concurrent clients and demonstrable activities of marketing and winning business are also useful indicators. 

The main factors in IR35 case law to pay close attention to are Personal Service, Control and Mutuality of Obligation, each of which are explained in this IR35 guide.

Don’t hire a ‘tail end Charlie’

The hirer must take care not to hire a ‘tail end Charlie’ and the contractor must take care not to become a ‘tail end Charlie’. This is where the contractor is hired for skills and time and simply takes on whatever tasks are asked of them. If HMRC or a judge determines that an engagement runs on that basis, it will almost certainly be inside IR35. It’s therefore imperative that organisations firmly communicate the correct way to engage contractors with those responsible for hiring contractors.

This means that if firms want to hire based on an employee-like relationship, where they offer guaranteed time and money in exchange for skills then they should hire temporary agency workers or offer a fixed-term employment contract. Or, if it’s ongoing work then hire an employee.

But for one-off project-based work, contractors can be hired on an outside-IR35 basis. This is where there is a clearly defined scope and payment is only made for work done. 

It’s important that the practices are adhered to and align with the contractually agreed terms. Otherwise, the written agreement could be deemed not to be genuine and thus set aside.

Contractors should not be part and parcel

Contractors who are hired to do on-demand projects do not normally become ‘part and parcel’ of an organisation. Therefore, the parties should take steps to ensure this does not happen. Pastoral care and appraisals should not be part of the relationship. This area of case law is part of the secondary factors, but will be considered by HMRC or a judge. 

Taking essential steps

The following steps should be taken by contractors and hirers to ensure that the relationship stays on the intended ‘outside-IR35’ track:

  1. Assess IR35 status comprehensively
  2. Ensure the contractual terms align with the relationship
  3. Agree and sign a Status Determination Statement (SDS)
  4. Collate supporting evidence throughout the contract

During the contract, if a contractor is asked to do something that’s not part of the services that they are contracted to do, they should make it clear verbally and in writing that they won’t or cannot do that. 

Of course, this is the ideal scenario. However, contractors engaged by small companies that are exempt from compliance requirements under the off-payroll legislation come April 2021 might find them to be less cooperative. These companies may seek to avoid signing documents regarding the employment status of the contractor worried that it implies business risk.

All the contractor can do is assure the hirer that there is no risk to them and that the contractor is merely building up evidence to help prove their IR35 status. This should be enough to allay any fears and get the document signed.

Contractors should keep a record of each separate contract going back six years. It pays to be prepared. Should HMRC conduct a tax inspection and dispute the status of an engagement, a tax inspector will look at the evidence which will later be examined at the First Tier Tax Tribunal, should it get that far.

Be aware of the risk

Failure or refusal to comply with the off-payroll legislation can mean damaging consequences for all involved. Hiring firms and agencies each inherit a tax liability risk. But, firms that refuse to engage with the legislation risk rising project costs and recruitment struggles. With the right strategy, businesses should have no issue with navigating the new rules and ensuring they can continue to hire genuinely self-employed contractors.

And for contractors, whilst they assume no statutory tax risk under the new off-payroll legislation, they still need to understand it in order to help steer and educate their own clients and ensure they operate on a legitimately ‘outside IR35’ basis.

It has taken a pandemic to press pause on rolling out this anachronistic tax into the private sector. All parties should now use the time wisely to work out how to navigate the new legislation so that they can continue to operate with confidence.

Dave Chaplin is CEO and founder of contracting authority ContractorCalculator and IR35 Shield and author of IR35 and Off-Payroll – Explained.

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