Olivia Bailey, solicitor in Harrison Drury’s employment team, considers the off-payroll working rules for private sector businesses, which are due to take effect from April 6, 2021.
The IR35 rules are designed to reduce tax avoidance by ensuring that contractors working in the same way as employees, pay the same tax and national insurance contributions (NICs) as an employee.
In the private sector, the off-payroll working rules, sometimes known as IR35, will apply to the contractual relationship between a worker (typically a contractor), an intermediary (which is usually the worker’s own limited company/personal service company) and a client (the party receiving services from the worker).
There is usually a written contract between the client and the intermediary for the worker to provide services to the client, as well as a contract between the worker and the intermediary. The off-payroll working regime is intended to prevent the avoidance or reduction of tax and NICs by the inclusion of an intermediary in the contractual relationship. The rules create a hypothetical employment contract directly between the client and the worker, requiring the payment of tax and NICs.
From April 6, 2021, medium and large private sector clients will be responsible for determining whether the worker would be regarded as their employee, if the worker was providing their personal services directly to the client, rather than through an intermediary.
The new rules require the client to carry out an employment status determination and provide a ‘status determination statement’ to the worker and the intermediary (the person/organisation that the client is contracted with).
Determining employment status
To determine the employment status of a worker, the contractual terms between all of the parties and the practical working arrangements should be to be considered. Factors such as personal service, mutuality of obligation, control and supervision are all key in determining whether the worker would be deemed an employee.
The client should firstly consider whether it requires the worker’s own personal services, or whether the worker can send a substitute in their place. If the contract includes a substitution clause, which enables the worker to send a substitute to provide the same services on the worker’s behalf, and is also used in practice (the worker has previously sent a substitute, or allocated the work to someone else), then it is likely that the off-payroll working rules will not apply, as the worker is not required to provide ‘personal’ services to the client.
If, however, there is no substitution clause stipulated in the contract itself or any other relevant document and substitution does not, or would not, occur in practice, then it is likely that the worker would be deemed to be providing ‘personal’ services to the client, indicating employment status.
Another key factor to consider is whether there is mutuality of obligation. The contract itself will often state that neither party is obliged to provide or accept work.
If the contract states the opposite (that the client is obliged to provide and the worker is obliged to accept any work) then there is clearly mutuality of obligation. However, in both cases, the actual working practices should be considered to determine the reality of the arrangement.
If the client has an element of control or supervision over the worker then this would also indicate employment status. Control may, of course, be derived from the terms of the contract itself, but working practices will also establish where the control lies.
This could depend on whether the client has the right to decide how the services are performed, and whether there is any flexibility, for example, over the working location and hours of work. If the client directs the worker to perform tasks at specific times, or has a high level of supervision over the worker, this is indicative of employment status.
Whilst the terms of a contract may expressly state that the worker has a right of substitution, or that there is limited control or mutuality of obligation, this will not necessarily place the contract outside of the off-payroll rules. It is vital to review the practical working arrangement which will be scrutinised if there is any indication of an employment relationship.
If the client determines that the worker’s engagement falls within the IR35 rules, then it must notify the worker and the entity with which it contracts, with the reasons for the determination. The results from HMRC’s ‘Check Employment Status for Tax’ tool can be used as a status determination statement, subject to certain requirements.
The worker, or the intermediary classed as the ‘deemed employer’, can dispute the employment status determination. The client must consider the reasons for disagreement and provide a response (confirming or overturning the determination) within 45 days.
Harrison Drury’s employment team can assist you with the application of the IR35 off-payroll working rules and deemed employment status. For more information, please contact Olivia Bailey on 01772 258321.