Even though there was a 12-month delay in implementing changes on a large scale to the UK’s IR35 off-payroll working rules (that came into force on 6 April 2021), the detailed guidelines of HMRC and subsequent changes remain an area of ​​uncertainty in the British economy.

IR35 gives is based on the rule that when a business engages with a person through an intermediary. If the person would have been considered as an employee for tax purposes if he had engaged directly with the business, then the person in question should be taxed as an employee.

Starting with April 6, 2021, when a business engages with a person through an intermediary (PSC – Personal Service Companies), the company as the client is now required to establish supposing that the arrangement falls inside IR35. And, therefore, if the person would be an employee in tax purposes in case that he had engaged directly with the business. The business must also issue a Status Determination Statement to the intermediary (contractor), approving its determination and providing the reasons.

 

Right now, there is no formal IR35 process in place for medium-sized businesses

According to specialists, more than half of medium-sized businesses don’t have a formal process in place for assessing a contractor’s employment status. And most of them are concerned about IR35 once their business gets back to normal after the pandemic.

Businesses should pay attention to the fact that if they do not comply will still need to pay tax and could face significant penalties.

More in tax next year for contractors

The Government announced a controversial 1.25 % National Insurance tax hike introduced as part of social care reforms for employees, employers, and the self-employed from April 2022.

With more legislation coming into effect (April 2022) and a potential mandate to report on ethnicity pay gaps, payroll professionals remain under pressure to provide reliable intelligence – to their colleagues and business.

These are just a few more challenges for a sector that is already struggling with the IR35 reform.

Checking of the ‘payroll compliance’

Even though HMRC has promised not to launch investigations into PSCs unless it suspects that it is deliberately in breach of the rules, HMRC still reserves its right to verify the payroll system to understand how contractors pay themselves.

And this could be a backup for HMRC to investigate IR35 compliance, without breaking its promise to refrain from launching investigations.

 

Are you inside or outside IR35? Be very careful

Being inside IR35 means that HMRC sees you as an employee for tax purposes. So your contract falls under the off-payroll working rules. Being outside IR35 means that your contract goes to self-employment, so you can operate tax efficiently.

But have in mind that: the roles from inside and outside IR35 can morph! And this needs special attention and accounting knowledge for avoiding confusion or penalties.

 

CEST users are still not getting clarity over their status

Check Employment Status for Tax (CEST) – is a tool used by HMRC. This application is providing a view on a particular worker’s employment status. Contractors or clients can use this application for helping them work out IR35 status.

But HMRC’s June data shows that 210,100 contractors from November 2019 to May 2021 were shown an ‘undetermined’ status. This suggests that many contractors are still not getting clarity over their status.

 

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