If you are in the contracting industry or use a personal Service Company ( PSC ) , you will be aware of the impending new rules coming in the Private Sector and the changes from 6th April 2021, it is complex and the official guidance in places confusing, the tool CEST provided by the HMRC to help with status determination has come under a great deal of criticism being inconsistent and unclear.
I have tried to briefly explain below how in practice the determination process should take place when correctly assessing as to whether a business falls within the confines of IR35, this article should also help in laying plans for the future.
There is too much to cover in one article , especially the accounting and tax implications of this to the companies caught by the IR35, I will cover this bit separately in the ensuing articles
The first point to note is that the new bit of legislation only applies to medium and large businesses engagers in the private sector, those engager businesses that are small do not have to apply the rules.
Accordingly, a Personal Service Company (PSC) engaged by a small business from 6th April 2021, will continue to self- assess its own IR35 status and be liable for its tax and NIC deductions under the existing IR35 legislation.
To be a large or medium sized engager, it must meet two of the following conditions:
• Turnover – More than £10.2 million
• Balance sheet total – More than 5.1 million
• Number of employees – More than 50
In terms of employees, part time employees are included in the qualifying number.
So by default, a business with turnover less than £10.2 million will be small and need not carry out determination of status, instead the business it engages will need to carry out the determination itself
The Five main factors ( there are others I shall discuss in the next article ) that has to be considered in working out if IR35 may apply are summarised below, for ease of illustration, Fred here is the main contractor ( engager) and Bob the subcontractor, through his company Bob Ltd
There must be no control or absolutely minimal control over Bob;
- No mutuality of obligations
There must be no ongoing and regular obligation for Fred to have to give him work and Bob also must have no obligation to accept it. To be self-employed you must be able to show that you can turn work down. HMRC conveniently try to ignore mutuality of obligations. Indeed it was not featured whatsoever on the first version of CEST, This is unfair!
The judges in court do not ignore mutuality of obligations! It has regularly been an important and deciding factor in many cases over the years both old and more recent!
Has Bob got an agreed substitute in his engagement with Fred (say Alan)?
Did Bob approve, choose and engage the substitute Alan? Has Bob ever used Alan?
If so who billed who?
If the substitute has been used, then Bob Ltd must still bill Fred, and Alan duly bills Bob Ltd.
You must never have the substitute billing the ultimate engager, Fred!
Some workers have, for the last few years, used substitute retainer arrangements!
- Does Bob Ltd pay the relevant insurance i.e. public liability insurance?
This is an important factor, but HMRC will try and dismiss this! They should not! Employees will not pay this type of insurance!
- Financial Risk
If the individual, via his personal service company, has very little financial risk, then this is not good. It leans towards an employment!
If Bob has very little financial risk, then he is like a deemed employee!
In summary, IR35 does not apply when Fred engages the individual directly, Bob, i.e. not through a personal service
Company, This will simply be a case of employed v self-employed, and a possible failure to operate PAYE.
You must remember that the new IR35 private sector changes only apply to work performed by Bob Ltd on or after 6th April 2021.
Finally, please look at the attached document, it is in 2 parts, if you happen to receive the first of the first part of the attached letter headed Model status Determination Statement ( when inside IR35 ), please do not ignore it, contact us immediately as there is a right to appeal against this determination under the new client-led disagreement
More on the subject to follow
We are here to help if you require any assistance 01892 5526696, there are also updated articles on our website www.shaikhandcoaccountants.com