HR professionals in public authorities may think that the extension of IR35 reforms to the private sector in April 2021 will not affect them. However, public-sector bodies need to be aware of, and prepare for, some changes to the rules.
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Payroll consultant Kate Upcraft explains how the IR35 reforms will affect your organisation.
Reforms to the rules on off-payroll working (known as IR35 or the intermediaries legislation) are due to be extended to medium and large private-sector organisations from 6 April 2021, bringing the private sector into line with the public sector, where the new rules came into force in April 2017.
The extension to the private sector was due to go ahead in April 2020, but was put back a year due to the coronavirus (Covid-19) pandemic. There is no indication that there will be further delay to the reforms, in spite of the continuing economic impact of the pandemic.
The IR35 rules can apply where an individual is engaged to provide services for a client via an intermediary (eg the individual’s own personal service company).
The key reform affecting the private sector from April 2021 is to shift responsibility for assessing the employment status of the contractor, for tax and national insurance purposes, from the intermediary to the end-user organisation. If the individual would have had employee status had they been engaged directly, the IR35 rules apply and the party that pays the individual’s fees (ie the client or an agency) is liable to deduct the tax and national insurance.
While the public sector has been assessing contractors and applying the IR35 rules since 2017, there are three key changes affecting public-sector HR from April 2021.
1. You must provide a “status determination statement” to the individual and to the party you contract with
Once a public authority has assessed an individual’s status, prior to April 2021, it has a duty to provide information to the party that it contracts with (eg the intermediary or an agency) confirming its determination on whether or not the individual would have been an employee had they been employed directly.
IR35 changes in the public sector
Under the new rules that are due to apply from April 2021, including in the public sector, the client engaging the individual must provide a “status determination statement” directly to the individual and to the party the client has contracted with.
The client must also provide reasons for its determination, having taken reasonable care in making the decision. The status determination statement and reasons must then be passed down by each party in the supply chain so that all parties are aware of it.
HMRC encourages the use of the Check employment status for tax (CEST) tool when making a status determination. It will stand by the results given by the tool, provided that the information entered is accurate and it is used in accordance with HMRC guidance.
2. You must have a dispute process in place
When the new rules come into force in April 2021, organisations will need to have in place a dispute process to deal with complaints from individuals who disagree with the decision that their engagement falls within IR35.
Policies and documents
If the contractor or the “deemed employer” challenges the status determination as being incorrect, the client must consider their representations and reply within 45 days, either stating that it has concluded that the status determination is correct or providing a revised status determination.
The aim of requiring a dispute process is to prevent risk averse clients from applying a blanket decision that IR35 applies to all their contractors.
There will be no independent appeal process available to a contractor, other than to take legal action. The Government has said that the client is in the best place to be able to make the status assessment and can respond to appeals “in real time”, which HM Revenue and Customs (HMRC) would not be able to do if it was responsible for determining disputes.
Prior to 6 April 2021, public-sector bodies are simply required to respond in writing within 31 days to any questions about their reasons for reaching their conclusion. In practice, they may have a dispute process in place, but they should check the guidance from HMRC, to ensure that they meet the requirements for what a process should involve.
3. Your organisation could be liable if another party in the chain fails to pay tax and national insurance
Another significant change that public authorities need to be aware of is that, if another party in the supply chain fails to pay the tax and national insurance required under the IR35 rules, the end-user client could ultimately be liable for this.
This measure is designed to ensure that organisations carry out due diligence in checking that the agencies that they work with are reputable and will fulfil their PAYE obligations. If HMRC is unable to recover the unpaid amounts from the party that has failed to meet its obligations, it will try to collect from the first agency in the supply chain. If this is not successful, liability will ultimately fall with the end-user client.
HMRC has published guidance on what end-user clients and agencies are expected to do to show that they have exercised reasonable care, and to avoid liability for another party’s unpaid tax and NICs.
The Local Government Association has said that “it is anticipated that any such liability could be minimised through ensuring robust processes and contracts are in place with agencies”.