United Kingdom: Tax authorities finalise guidance for revised IR35 rules for contractors from 6 April 2021

In brief

Following the publication of the final legislation, HMRC has updated its guidance in the Employment Status Manual on the revised IR35 rules that will apply from 6 April 2021. The revised rules impact how contractors who are engaged through personal service companies (PSCs) are taxed and imposes a greater administrative burden on the companies that engage them.


Contents

The key test for IR35 (both now and under the revised rules) is; would a contractor be an employee if they were engaged directly. If so, the contractor is within IR35. From 6 April 2021, large and medium-sized companies will need to assess whether contractors working through PSCs are inside or outside of IR35.  The legislation was published in the Finance Act 2020, although introduction was delayed by a year until 2021 due to COVID-19. HMRC has now removed all reference to the draft rules in its guidance, indicating that the revised rules are coming in in their current state.

Amendments to HMRC's guidance are:

For Companies

  • Template responses have been published for companies to use when responding to requests to confirm their size. Companies have 45 days to respond to such a request and have to assess their size for each tax year based on financial data from the past two consecutive financial years.
  • If a company provides a CEST result as its status determination statement, this indicates that (a) the company agrees with the outcome and (b) that the CEST outcome is the company's conclusion.
  • HMRC re-iterates that it will take a light-touch approach to penalties in the first 12 months so penalties will not be levied unless there is evidence of deliberate non-compliance.
  • HMRC states it will only pursue other persons in the chain following an insolvency (or threatened insolvency) if there has been tax avoidance, evasion or repeated insolvencies leaving unpaid amounts to HMRC.  HMRC also provides examples of (a) a genuine business failure due to an unrelated, significant contract terminating where HMRC would not pursue other persons and (b) a business failure that was due to offering deliberately low rates in the knowledge that tax and NI are not being paid where HMRC would seek to recover from other persons.
  • Where HMRC does seek to recover from another person in the chain, this would not extend to directors or officers of that person.
  • When calculating the amount of deemed employment income and the deductions to be made, any contractual reductions in rate to take account of the income tax and NICs due, will be added back onto the payment and the reduction will be treated as part of the deduction already borne by the PSC.
  • An example shows how deductions will be made further up the contractual chain (e.g. by the end client when there is an overseas agency) and are fed down to the PSC.

For Contractors

  • HMRC re-iterates its earlier statement that it will not use information acquired as a result of the changes to open new compliance checks for previous tax years (unless HMRC suspects fraud or other criminal behaviour). HMRC will not request copies of any status determinations that were undertaken for the 2020-21 tax year (e.g. before the delay was announced), although HMRC may use that information if it is provided. Having this in written guidance is helpful, but it does highlight the fact that something once seen, cannot be unseen so HMRC can use any information that it is provided.
  • HMRC promises to issue a self-help guide for contractors and agency workers on how to avoid entering into non-compliance arrangements.
  • Contractors are entitled to statutory payments, such as statutory sick pay or statutory maternity pay, to the extent they receive earnings from the PSC, regardless of the amount deemed to be employment income due to IR35. Therefore, in order to be entitled to such payments, the contractor must be an employee of the PSC and receive a salary from the PSC. That salary must go through the payroll of the PSC, even if no deductions are made because the payment has already been subject to deductions.

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