IR35 Reform – What does it mean for businesses?

The long-awaited IR35 reforms came into force in the UK on 6 April 2021. To put simply, IR35 is a tax anti-avoidance rule designed to combat “disguised employment” in situations where an individual contractor is providing their personal services (i.e. their labour) to an end-user via their own intermediary, such as a personal services company or partnership.IR35 applies when the contractor would be an employee (or officeholder) for tax purposes if they were hired directly by the end-user. If IR35 applies, PAYE and NICs must be operated in respect of the fees paid to the personal services company.

As per the old rules (pre April 2021), independent contractors operating under limited companies, the self-employed individuals in question, had autonomy over how they managed their tax status and dealings with HMRC. However, the reforms now include such contractors under the umbrella of IR35, seeing a shift in responsibility for assessing workers’ employment status for tax purposes from the individual employees to the employers themselves. Businesses will hold sole responsibility for assessing the employment status of their independent contractors and the limited companies they may be operating under and must take reasonable care in making that assessment and confirm its assessment together with reasons in a Status Determination Statement (SDS). They then must provide the SDS to the contractor before making the first payment to them. In practice, we expect that contractors accepting a new assignment are likely to want to know in advance whether they will be assessed as within the scope of IR35.

Businesses are being asked to perform a task that they have never had to tackle before, and there is significant regulatory risk in the case of non-compliance and therefore it’s of paramount importance to understand this new responsibility and act accordingly.