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Business Services  •  Business Tax  •  Payroll Tax

April 2021 changes to the tax rules for contractors and consultants providing their services through a personal service company (PSC)

By RJP LLP on 27 January 2021

After being delayed in 2020 due to the COVID-19 pandemic, the anticipated revisions to IR35 (known as off-payroll working) are finally coming into operation from 6 April 2021.

The new rules will have a significant impact for those businesses that use contractors who provide their services through a PSC and for the contractors themselves. In summary the rules will require a business that is medium-sized or large (referred to as the end client or the engager) to review and determine the status of the contractor or consultant. If the conclusion of the review is that the status is one of employment, PAYE must be deducted from the amounts paid to the PSC. Employers’ national insurance will also fall due (payable by the end user).

The definition of a medium or large-sized entity is found within the Companies Act; although there are exceptions, typically a good guide is that a company will fall within the definition of medium or large-sized if it is required to have an audit.

Understanding the changes to off-payroll working / IR35 rules

Old Rules: Before 6 April 2021
If a contractor provided services via their limited company to a business in the private sector, it was the contractor’s responsibility to determine their employment status and apply the IR35 rules if applicable.

New Rules: From 6 April 2021
The responsibility for deciding the status of the contractor or consultant shifts from the individual to the user of their services. Similarly, this moves the tax risk from the individual to their client (i.e. the medium or large-sized end user of the services provided via the PSC).

Where the end user concludes, as a result of their review, that the contractor does fall within the status of an employee, they will be required to:

• Issue a status determination statement (SDS) to the contractor;
• Apply PAYE deductions to any payments made to the contractor;
• Pay over to HMRC the PAYE deductions made; and
• Pay employers’ national insurance contributions to HMRC on the value of payments made to the contractor.

Where there is an intermediary in the chain (i.e. an agency or a subcontractor) the end user/engager must issue the SDS to the intermediary in order that they are aware of the decision made and can then apply PAYE deductions to the payments due to the contractor.

The old rules will continue to apply to contractors who provide their services via their PSC to small entities within the private sector (i.e. the responsibility lies with the contractor to determine their employment status).

Status Determination Statement (SDS)

The responsibility to provide an SDS lays with the end user/engager and therefore it is important that they have undertaken a review of a contract they have with anyone that provides services to them through a PSC.

If the end user doesn’t meet their statutory obligation to undertake this assessment or doesn’t take reasonable care in making and communicating the IR35 status decision for each engagement, they can be liable to penalties.

Similarly, if the SDS provided to the intermediary or to the end user is not correctly applied, penalties will be charged.

What if the contractor disagrees with the SDS?

There is a process set out for the contractor to raise a disagreement with the SDS. In summary this requires them to:

• give details of the employment status determination they disagree with;
• give their reasons for disagreeing; and
• keep copies of any records about disagreements.

The end client will have 45 days from the date of receipt of the disagreement to respond. During that time payments should be made using the rules which are in line with the client’s original determination.

If, as a result of the appeal, the conclusion as to the contractor’s status changes, the client should issue a revised SDS and confirm the date from which the revision is valid.

If you need help with payroll services and determining your status for IR35, please contact us via partners@rjp.co.uk

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