April 2021 off-payroll IR35 private sector rules – the basics

From April 2021, new ‘off-payroll’ rules will be applied to contractors providing services to private sector clients. This is a fundamental change to how the IR35 rules have operated since 2000. Here we explain what the new rules mean, and how you can prepare in advance of the implementation date.

IR35 – so far

The Intermediaries Legislation (a.k.a ‘IR35’) became law in April 2000. The rules were put in place in response to the rapid growth in the number of professionals providing contract services to clients via their own limited companies.

If you are working for a client in a similar way to that of an employee, rather than a ‘self-employed’ contractor, then IR35 is likely to apply to you. If your contract work is deemed to fall under the IR35 rules, then your income will be subject to standard rates of employment tax.

You will pay significantly more tax and NICs if your contract work is caught by IR35.

Off-payroll rules – in the public sector

Determined to clampdown further on limited company workers, new ‘off-payroll’ rules were rolled out to all public sector organisations in April 2017.

This extra layer of legislation was created as the government believed that the current IR35 rules were not effective enough. As a result, the onus for determining whether or not a public sector contract falls within IR35 or not now falls on the end-client rather than contractors themselves.

Keen to avoid any potential tax liability for making incorrect employment status determinations, many public sector clients have decided to make blanket IR35 decisions (i.e. claim that entire teams of contractors fall within the rules).

Off-payroll rules – in the private sector

Although the public sector roll-out was plagued by difficulties, HMRC claimed that it was a success and at Budget 2018 announced that the off-payroll rules are due to be extended further – to most private sector organisations – from April 2020.

The start date was later delayed until April 2021, following the disruption caused by COVID-19.

This means that, unless you have a contract with a ‘small company’ (see below for the definition), you should prepare in advance for the new rules.

What do the new rules mean for contractors?

  • Clients will be responsible for determining whether or not a contract assignment is caught by the IR35 legislation.
  • Clients must take ‘reasonable care’ when working out their employment status. Unfortunately, there is no clear definition of this term, which is why clients are likely to err on the side of caution.
  • HMRC has an online employment status tool, CEST. which many engagers may use to help work out the status of contractors. The tool has been widely criticised for being inaccurate, however past experience suggests that HMRC are likely to improve it significantly before April 2020.
  • The end-client must provide a status determination statement to the contractor and the party directly engaging the contractor (usually the agent). Until this has happened, the client remains responsible for collecting taxes and NICs.
  • If you don’t agree with the client’s status decision, you can ask for the decision to be reviewed (within 45 days). If this fails to be done, then the client rather than the agent will assume the tax/NIC liability for the contract.
  • There is a ‘small company exemption‘ – so the off-payroll rules will not operate if your client meets the Companies Act definition (i.e. turnover of £10.2m or less, balance sheet less than £5.1m and no more than 50 employees).
  • If your contract is caught by the off-payroll rules, your limited company will no longer be able to claim the 5% allowance which is meant to cover the administration costs of running a company.

Should I stay limited if my contracts are caught by the new rules?

Some contractors who are caught by the private sector off-payroll rules may decide that life will be easier if they stop working via their own limited companies, and opt for the umbrella or agency PAYE route.

However, given that there is so much uncertainty about how the rules will operate in practice, it may be wise to keep your options open for the time being.

Also, given that IR35 applies to a contract, not a person or company, you may have one contract which is caught, and another which is not – so you will still benefit from running your company.

What can contractors do to stay outside IR35?

Here are some things contractors can do to maximise their chances of remaining IR35-free.

  • If you have the option, seek out ‘outside IR35’ opportunities. This may be easier said than done in a competitive market, and with larger clients blanked banning limited company contractors.
  • Ask for a Confirmation of Arrangements letter to be drawn up, which specifies the aspects of your working practices which demonstrate that you are operating outside IR35.
  • Collect evidence which further shows that you are operating in business on your own account, not as a disguised employee.
  • Always have your contract wording and working practices reviewed by a contract status specialist.
  • Take out tax investigation insurance just in case you are subject to an HMRC investigation.
  • If you are caught by the off-payroll rules, don’t be tempted to join a non-compliant payment scheme, which may appear to be an attractive alternative to using a PAYE umbrella or keeping your limited company setup. These schemes are illegitimate, and you may well end up being pursued by HMRC for all back taxes, as well as fines.

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Last updated: 3rd May 2023