Law firm Paris Smith warns local businesses not to ignore IR35 changes

A leading Hampshire employment lawyer has warned local businesses not to ignore the IR35 changes that came into effect on 6 April.

Clive Dobbin, partner and head of the employment team at Paris Smith, said: “With the disruption caused by Covid and Brexit, I’m concerned that many local businesses have yet to address the new rules which are fairly complex. It’s vital they get to grips with their responsibilities in relation to engaging existing and new contractors as soon as possible. HMRC has committed to supporting organisations adjust to the change, but they will take action where there is deliberate non-compliance and will expect organisations to be aware of and applying the rules.”

The new rules see employers of medium and large businesses being responsible for determining whether a contractor is ‘inside’ or ‘outside’ the business, either in the public or private sector. These rules are designed by HMRC to crack down on people avoiding national insurance and income tax by supplying their services through personal service companies.

IR35 rules explained

IR35 rules affect consultants that work for a client via a personal service company. For example, ABC Limited engages Joe Bloggs via his company Joe Bloggs Limited. Historically, the individual has been responsible for his or her own tax arrangements in this situation. From 6 April 2021, this responsibility shifted to the end client. The end client now has to decide whether the individual should be treated as employed rather than self-employed for tax under the IR35 rules. This is now called a status determination. If the answer is yes, the client (or any third party in between) is responsible for deducting the tax when they pay the personal service company.

Who is affected by the new IR35 rules?

All medium and large-sized companies who engage individual consultants or contractors via a personal service company or another intermediary company are affected by the rules.

How do you assess whether consultants should be treated as employed for tax?

Essentially the end client needs to ask whether the individual would be regarded as an employee if the contract had been agreed directly between the individual and the end client. In deciding this they need to look at the arrangements in practice as well as the contract terms. The government has a free online self-check tool to help companies with this assessment – search for the CEST (Check Employment Status for Tax).

What should businesses do now?

• Review – identify which consultants may be caught by the new rules
• Information – request any further information needed from the contractor and any third parties to make the assessment
• Assess – carry out the required status determination using the CEST tool and sense check
• Notify – issue status determination statements to all consultants and others in the chain
• Implement – if the outcome is deemed employment, arrange to deduct tax at source or notify others in the chain that they are required to do so
• Record – keep a record of all assessments to demonstrate compliance