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Who determines your IR35 status and who pays employment taxes? Managing IR35 changes.

Posted by Ross Bramble on Apr 7th, 2021 | IR35

Who determines your IR35 status and who pays employment taxes? - a freelancer writing notes | Crunch

The changes to off-payroll working (IR35) rules for the private sector were implemented on 6th April 2021. The new rules mean that responsibility for determining your IR35 status, and which entity pays Income Tax and National Insurance Contributions (NICs) to HMRC is now, largely, the same for both the private and public sectors. 

The new IR35 rules will have a significant impact on contractors working through a Personal Service Company (PSC), Recruitment Agencies, all large and medium-sized end-clients in the private sector and all organisations in the public sector.

Now that the new rules have arrived, PSCs operating in the private sector are no longer responsible for assessing the IR35 status of their assignments. The responsibility will pass to the end-client, unless that end-client meets the small business exemption criteria, or are based overseas, with no UK presence. (see below for further details)

In the public sector, it’s still the responsibility of the end-client to determine the IR35 status of all assignments involving intermediaries or PSCs.

All parties involved in a labour supply chain need to ensure they remain IR35 compliant.

If your contract is inside IR35, the end client (or Employment/Recruitment Agency if there is one involved) will pay Income Tax and NICs (employers and employees) to HMRC.

The end-client must make the decision and pass a record of the status assessment, known as a Status Determination Statement (SDS) to all parties in the labour chain. Read on for further details on all the changes, exemptions, and implications.

Our IR35 Calculator gives contractors a free, accurate IR35 assessment of any assignment. We also offer the option to purchase a detailed report breaking down the areas of risk and giving recommendations on actions you could take to change your status. Our IR35 Hub has all the help and support you need to understand IR35 and how it affects you. We’ve also produced an article on “How to manage the new IR35 rules as a contractor or hiring business“.

We’ve summarised the main changes and impacts below.

Our IR35 Hub has all the help and support you need to understand IR35 and how it affects you. We’ve also produced an article on “Getting your contractor business ready for IR35 in the private sector“.

The changes for the private sector mean the end-client is now, usually, responsible for determining the IR35 status of an assignment with a Personal Service Company (PSC). The rules are consistent with the changes brought in for the public sector in April 2017.

HMRC has confirmed that it will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time following the reform, and businesses’ decisions about whether their workers fall within the IR35 rules will not automatically trigger an enquiry into earlier years.

This means that almost all decisions about your employment status will now be made by your end-client or Employment Agency and your limited company will (usually) not be the one who decides if a contract is inside or outside of IR35.

The only exceptions to these new rules are if your private sector end client is based completely overseas, with no UK physical presence, or if you’re working for a private sector client that meets the criteria for a small business exemption. See below for further details on these exemptions.

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The IR35 rules now apply to ‘medium or large’ sized businesses in the private sector and all organisations in the public sector. There’s an exemption for end-clients who are ‘small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:

  • Annual turnover is no more than £10.2 million
  • Balance sheet total is no more than £5.1 million
  • No more than 50 employees.

Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of an assignment remains with the PSC and the new rules do not apply.

The government has included clauses in the legislation to ensure medium or large-sized businesses do not set-up arm’s length companies or subsidiaries to procure services from PSCs. The legislation applies to the parent company based on the aggregate amount of turnover and the aggregate amount of the balance sheet total of the connected entities.

The government has introduced a legal obligation on clients to respond to a request for information about their size from an agency or worker.

There’s no small business exemption for public sector organisations and the legislation will apply to all end-clients engaging PSC workers in the public sector.

Where the end-client makes the status assessment, this must be passed onto the contractor (and any agencies involved in the labour supply chain) in the form of a Status Determination Statement (see below).

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Self Assessment - Get the lowdown!

Provided an end-client or hiring business is completely based overseas, with no UK offices or branches, then the new IR35 Private sector rules do not apply and it remains the responsibility of the PSC or limited company contractor to assess the IR35 status of their assignment and pay any employment taxes due.

If you are based overseas and working for a UK company, you should take specialist advice on the taxes you need to pay based on your country of residence.

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The end-client must confirm the IR35 status of an assignment by providing a ‘Status Determination Statement’ (SDS). The SDS must be provided in writing to the PSC worker and, if an agency is involved in the labour supply chain, a copy must be provided to the agency responsible for paying the PSC. The SDS must be provided to all parties before the assignment commences.

These arrangements place most of the responsibility for administering an SDS on the end-client and/or the fee payer (if an agency is involved).

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It’s the responsibility of the end-client to establish arrangements to consider any disputes from PSCs about the SDS. The legislation does not specify how such arrangements should work in practice but does state a time limit of 45 days to respond, in writing, to the PSC with the outcome of the review of the dispute.

The decision must either confirm the original SDS is upheld, or, if it involves a revised SDS or conclusion, a new SDS must be provided in line with the arrangements outlined above.

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The legislation is designed to ensure the organisation with responsibility for issuing the SDS, or the fee-payer if an Agency is involved, is responsible for any employment tax liabilities arising.

The legislation also allows HMRC to recover tax liabilities from another ‘relevant person’. A relevant person is any party involved in the payment to a PSC. This means HMRC can recover tax from the highest party in the labour supply chain which is not complying with the legislation. HMRC believes this will ensure compliance with the rules across all parties involved in the labour supply chain.

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The new rules remove the 5% allowance for PSCs to meet the costs of administering the off-payroll working rules. The allowance will continue for PSCs working with ‘small’ end-clients  in the private sector as defined above. The allowance will also continue for assignments where the end-client is based entirely overseas.

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The government has updated the Check of Employment Status Tool (CEST) a number of times. Even after these changes, though, there are still a number of concerns amongst contractors and within the wider industry about the accuracy of the tool.

Crunch has produced our own IR35 Calculator tool which takes into account all the factors that could affect your IR35 status, producing more detailed results than CEST. The tool has been independently verified by leading IR35 experts, and can be used by contractors to get a free IR35 status assessment. We also offer a detailed report outlining all the areas of risk for IR35 which can be purchased for just £49.50 +VAT.

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There were various consultations and reviews into private sector IR35 changes. On 7th February 2020, HMRC published some minor changes to the off-payroll working rules. HMRC announced the following:

  • Customers will not have to pay penalties for errors relating to off-payroll assignments in the first year, except in cases of deliberate non-compliance
  • Information resulting from the changes will not be used to open new investigations into PSCs unless there is reason to suspect fraud or criminal behaviour
  • The new rules will only apply to services carried out from 6th April 2021
  • The government will place a legal obligation on clients to respond to a request for information about their size from an agency or worker

HMRC also said that if an end-client is based wholly overseas, with no UK presence, then the new rules do not apply.

It’s important that contractors have the ability to assess the IR35 status of their assignments correctly in order to ensure they agree with the assessment of their end-clients and pay the correct tax. Our IR35 Calculator is free for contractors to use and gives a fast accurate assessment of the IR35 status of their assignment.

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Often an agency will be involved in the labour supply chain between the end client and a limited company (and worker) which can complicate the flow of funds and deductions for Income Tax and NICs. The following illustrates the differences between the public sector and the private sector where an agency is involved.

Assignments that are inside IR35  (when an agency is involved)

  1. End-client pays the agency for the work done by the limited company (its worker)
  2. End-client is responsible for determining IR35 status of the worker (because the end client is best placed to establish employment status based on contract and working practices)
  3. End-client passes on the Status Determination Statement (SDS) to the agency who must, in turn, pass it on to the contractor before the contract or assignment starts
  4. If inside IR35, the agency pays Income Tax and NICs (employers and employees) to HMRC and pays the net amount to the limited company (because the agency disburses payment to the limited company)
  5. The limited company pays the net amount to the worker by way of a tax-free dividend or salary. Our Crunch software can take care of this for you.

Free IR35 Guide - grab yours!

Assignment is inside IR35 and for a ‘small business’ within the private sector (when an agency is involved)

  1. End client pays the agency in return for work done by the limited company (its worker)
  2. Agency pays the contracted amount to the limited company
  3. Because the small business exemption applies, the limited company (or PSC) is responsible for determining the IR35 status of the worker
  4. If inside IR35, the limited company pays a deemed employment payment to the worker. This payment will have Income Tax and Employees NICs deducted and paid to HMRC. The limited company will also have to pay any Employers NI that’s due. Again, our Crunch software can manage this for you.

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IR35 rules have not usually affected sole traders. The end-client has always been responsible for deciding the employment status of an assignment that is carried out by a sole trader. Employment taxes are not accounted for at source if a person is truly self-employed. The new IR35 rules do not change this at all. However, end clients do need to ensure that they correctly assess any roles they offer to sole traders and the working practices involved.

As we’ve seen recently with some high profile court cases, simply saying someone is self-employed is not enough. The actual working practices matter as well as the contract in place. Our article ‘Am I an employee, self-employed, or a worker?’ explains more about this.

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Crunch responded to the government’s original consultation in 2019. It’s disappointing that most of the issues raised by us, and other responders, were largely ignored in the final legislation. Of particular concern remains the:

  • errors and inconsistencies contained in the government’s online Check of Employment Status Tool (CEST)
  • additional investment required to complete an employment status determination by an end-client on a contract by contract basis
  • removal of the 5% allowance for most PSCs to administer off-payroll working rules
  • risks to PSCs from the dispute resolution process which are the responsibility of the end-client to administer.

Our article ‘How to manage the new IR35 rules as a contractor or hiring business‘ explains the action you need to take to ensure you’re compliant with the new IR35 rules.

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In this webinar, hosted in late 2019, we looked at what the changes to IR35 mean for contractors working through a Personal Service Company. We explained the impact on existing or future contracts, how you can get your IR35 status checked, and what you may want to do post-April 2021 to mitigate against the changes.

The slides from the webinar are available to download in pdf format.

We held a Q&A after the webinar which is available below [Skip to Q&A]

Our “What is IR35?” hub is the place to head for all things IR35 – we have an independent IR35 Calculator tool to help you see if you’re at risk from IR35, a jargon-free IR35 business guide as well as articles explaining everything you need to know about IR35.

We have updated some of the answers now that the new rules are in place.

Does the length of the contract affect the IR35 status of an assignment?

The length of the contract is a factor but it must be considered in the context of the overall assignment.

A long contract may be acceptable for a complex project where the specialist input of a contractor is required, and where the contractor’s skills are scarce and not available to the end-client. However, a long contract, maybe covering maternity leave in an organisation may be viewed as simply a replacement for an employee, and the nature of the assignment would be one of an employee.

Many shorter contracts for different clients – overlapping at times – could be a good indicator that the PSC operates outside IR35.

When will deductions for employment taxes start?

The new rules take effect on 6th April 2021. If you have worked on an assignment before 6th April, and the assignment is inside IR35, then the fee payer (agency) or the end-client is responsible for deducting employment taxes even if the work was done before the new rules came in and the date of receiving payment is on or after 6th April 2021.

Who makes the deductions for employment taxes after 6th April 2021?

If an assignment is inside IR35 and you work directly for an end-client, then after 6th April 2021 the end-client will deduct income tax and employee National Insurance Contributions (NIC) from your gross payment. The end-client will pay the employer NIC.

If an agency is involved, and the agency is the fee-payer (ie. the entity which actually pays you), the agency will deduct income tax and employee National Insurance Contributions (NIC) from your gross payment. The agency will pay the employer NIC.

If your limited company works for a ‘small’ end-client then your limited company is responsible for income tax, employee NIC and employer NIC (ie. there is no change to the current rules).

You don’t have a choice over whether to be ‘employed’ or not. It is the end-client’s responsibility to determine your employment status based on its review of your assignment.

If an assignment is outside IR35 then employment taxes are not required to be paid, your PSC should receive the payment gross from the end-client or agency, and your company will account for these in your Corporation Tax return – with any personal tax paid through your company payroll or your annual Self Assessment as usual.

When you mention an ‘agency would pay the fees’, would YunoJuno count?

YunoJuno would be acting as the agency in this instance, so if the assignment is inside IR35, YunoJuno will deduct employment taxes. YunoJuno has published their own answer to this question on their website.

What happens if I have an overseas client?

This is a complex area and you need to discuss how your overseas end-client (regardless of location) is implementing the new regulations.

Update – March 2020 – The government has confirmed that the new rules will not apply if the client is wholly based overseas with no UK presence. If they do have a UK office or premises the rules will apply after April 2021.

HMRC guidance suggests the overseas end-client will need to provide a Status Determination Statement. IR35 applies when you pay your taxes in the UK.

What is a labour supply chain and does the size of entity at each stage make a difference to issuing a Status Determination Statement?

Now the new rules are implemented, the end-client, regardless of the number of entities in the labour supply chain, will always be responsible for issuing the SDS and passing it to the next party in the chain. It is the size of the end-client, and not the agencies in the labour supply chain, which determines whether an SDS should be prepared (‘small’ organisations are exempt from the new rules).

A simple labour supply chain would be an end-client engaging a personal service company (PSC) directly – the end-client prepares the SDS and passes it to the worker operating via the PSC.

If an agency is involved, the end-client passes the SDS to the agency which is then responsible for passing it to the worker operating via the PSC – the agency does not prepare the SDS.

If more than one agency is involved, the end-client will pass the SDS to agency 1, who will pass it to agency 2 who will then pass it to the worker operating via a PSC.

If any party in the labour supply chain fails to pass on the SDS, they become responsible for employment taxes.

The end-client may decide to pass the SDS to agencies and the worker at the same time.

Are SDS legally required to be published when mandated to go PAYE?

If the assignment is offered as a PAYE employed assignment, there is no need for an SDS as IR35 does not apply because you are being employed as an individual rather than through your limited company.

What about timesheets?

Your end-client may ask for a timesheet to be submitted by a worker personally. If this is for a fixed number of hours per week, and payment is made to you personally, this may indicate the assignment is one of employment.

If you do submit a timesheet because the end-client needs to calculate payments to your limited company, it’s important that any payment received is in the name of your company and you have invoiced in the name of your company.

What does inside and outside IR35 mean?

If you’re inside IR35, the relationship between you and your end-client is one of employment and employment taxes are due. If you are outside IR35, you are a self-employed worker and no employment taxes are deducted at source.

If a computer consultancy is running a project for a client of theirs, and they enter into a contract with my PSC, who is the “end client” – the consultancy (who my PSC has the contract with), or *their* end client?

It depends on the nature of the computer consultancy. If the computer consultancy is not an agency (that is, they are actually delivering the work outsourced to them by using your PSC), then the end client for your PSC will be the computer consultancy. If the computer consultancy is only an agency (recruitment company) delivering workers including PSC to their end client, then the PSC’s end-client will be the end-client of the computer consultancy.

Is the legislation retrospective?

IR35 legislation hasn’t changed – HMRC has introduced new rules about the party who should determine the IR35 status of an assignment.

HMRC has said it won’t look to investigate the application of IR35 rules by PSCs retrospectively unless there is evidence of fraud or criminal behaviour. However, it remains to be seen the position HMRC may ultimately take.

What’s the situation re Housing Associations and Charities?

There is no blanket answer to this question. It depends on how the individual body is constituted. HMRC says ‘companies owned or controlled by the public sector’ are public sector bodies for the purposes of IR35.

You should check with your end-client whether they are controlled by the public sector.

Will my rates go up if I am inside IR35?

A review of the impact of the new rules for IR35 in the public sector showed about 25% of contractors were able to negotiate an increase in their day rate. Amounts varied.

If you wish to preserve your net income, you should look to increase your day rate by about 20% if possible.

Should I keep my limited company open?

There is no blanket answer to this question.

Your company may have high accumulated profits you are looking to preserve for the future.

If you work on assignments inside IR35 and outside IR35, and you have different revenue streams into your company then it’s worthwhile keeping your company trading.

You should step back and think about your company’s potential for growth and expansion over the medium term before making a decision on continuing to trade or not.

What if I don’t have an SDS by April 2021?

An end-client or agency should not be deducting any employment taxes without issuing an SDS. It’s important you discuss your employment status with these parties well in advance of April 2021.

IR35 legislation requires an SDS to be prepared and provided to a worker by ‘medium’ and ‘large’ sized organisations, and always for public sector organisations.

How will I know if my end-client is ‘small’?

You will need to discuss with your end-client directly. They should confirm the following:

  • Turnover of less than £10.2 million
  • Total balance sheet less than £5.1 million
  • Less than 50 employees

If two of these criteria apply, then it is a ‘small’ organisation.

The new rules specifically prohibit the use of smaller subsidiaries to manage contractors to avoid implementation – it is always the ultimate end-client used to assess the size of an organisation.

What’s happening with the CEST (Check Employment Status Tool) from HMRC?

The CEST tool is due to be updated by the end of 2019. HMRC recognises it does not currently deal with the Mutuality of Obligation test as comprehensively as it should. The output from the tool has been presented as evidence at recent HMRC Tribunals.

Will this affect my Self Assessment?

If you’re registered to submit a Self Assessment then you must continue to do so. Your IR35 income will be ‘income from employment’ in your tax return.

What is financial risk?

If your company is at risk of non-payment by an end-client then the company is carrying a degree of financial risk.

What about substitution?

If your contract states you can send a substitute then this is an indicator the assignment is outside IR35. However, the decision by your company to send a suitably qualified substitute should not be able to be vetoed by the end-client. If your company has previously sent, or your end-client previously accepted a substitute, that is also an indicator the assignment is outside of IR35.

If your PSC only offers your services then this can be a sign that the assignment is inside IR35, you could consider whether you are able to have an agreement with another PSC or contractor to cover each other when necessary.

What is an Umbrella Company?

Many agencies use an Umbrella company to process the payroll for the contractors they place with end-clients. The contractor becomes an employee of the Umbrella company under PAYE arrangements. The Umbrella company deducts all employment taxes and pays these over to HMRC. You usually pay a fee per timesheet processed by the Umbrella company.

Changes were made to IR35 in the private sector on 6th April 2021

The private sector changes shifted the responsibility for making IR35 status assessments from the intermediary providing the worker (i.e. the limited company or PSC) to the agency or the end client who pays the limited company. The following changes were made to IR35 in the private sector on 6h April 2021:

  • Businesses (end-clients) at ‘medium-sized’ and ‘large’ companies are now responsible for assessing an individual’s employment status
  • The reform will not apply to the smallest businesses if they meet the classification of a small company
  • Since 6th April 2021, medium and large businesses need to decide whether the IR35 rules apply to an assignment with individuals who work through an intermediary such as their own limited company or PSC
  • Where it is determined that the rules do apply, the business, agency or third party that pays the individual’s limited company or PSC must deduct Income Tax and employee National Insurance Contributions (NICs) and pay employer NICs to HMRC

If you’re in need of more information or active support from a team of experts, our IR35 Hub has all the information you need, whether you’re an end-client, recruiter or contractor. Crunch has a range of products and tools to help you navigate IR35 and get the best possible outcome for your business.

Need more IR35 advice?

Our “What is IR35?” hub is the place to head for all things IR35 – we have an independent IR35 Calculator tool to help you see if you’re at risk from IR35, a jargon-free IR35 business guide as well as articles explaining everything you need to know about IR35. For Crunch clients, we also have an IR35 service for those looking for our expert guidance.

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