1. What if I qualify for the small company exemption now, but this changes in the future?
Incorporated businesses qualify for the small company exemption to IR35 provided they meet two of the three following criteria:
(i) annual turnover of less than £10.2 million;
(ii) a balance sheet of less than £5.1 million; or
(iii) 50 employees or fewer.
Unincorporated businesses need only have a turnover of less than £10.2 million to be exempt from the rules.
If you are an exempt small company, you need to keep this status under constant review.
If your business status changes so that you no longer qualify for the exemption, your window for complying with IR35 differs depending on whether your business is incorporated or unincorporated.
If your business is incorporated, you need to have two consecutive financial years where your business falls outside the small company exemption before you start applying IR35 rules.
If your business is unincorporated, then you need to start applying the IR35 rules from the start of the tax year following the calendar year during which you fell outside the exemption.
This can be quite tricky to get right, so we recommend seeking the advice of a tax expert on your exemption status and if/when you need to start applying the new IR35 rules.
2. What happens if I have a contract that spans 6 April 2021?
Not all contracts will end neatly at the end of the tax year and some businesses will have contracts caught by IR35 that span the reform implementation date on 6 April 2021.
In these situations, the key to ensuring you are compliant with IR35 is that the new rules will only apply to payments for work carried out on or after 6 April 2021.
If the work was completed before 6 April 2021, but the payment was made on or after that date, this will not be in breach of IR35.
However, it is important to make sure that the date of work is clearly documented (e.g. in the invoice), in case HMRC queries the payment.
3. How do I know if the intermediary used by my contractor is caught by IR35?
There is a misconception that IR35 only applies to contractors who work through personal services companies (PSCs).
However, even though PSCs are by far the most common structures for intermediaries, any intermediary – including limited companies, agencies, or partnerships – through which a worker performs services for an end user can be caught by IR35.
It is worth noting that for a PSC or limited company to be caught by IR35, the worker providing services or a person connected to them (such as a spouse) need only have a 'material' (more than 5%) interest/shareholding in that limited company.
HMRC has deliberately set the threshold quite low to ensure most intermediaries are captured by the new rules.
4. How do I know if I am the end user?
Sometimes referred to as "end client" or simply "client" by HMRC – the end user for the purposes of IR35 is the person who receives the worker's services.
In complex supply chains, it is not always clear who the end user is for the purposes of IR35.
There is some guidance on the government's IR35 web pages to help identify different entities in a supply chain, but essentially the end user is the entity that looks most like the employer in a relationship – i.e., the entity who directs and controls the worker.
5. Can I make life easier by taking a blanket approach to determinations?
Although it is often time-consuming and complicated, companies should always assess the impact of IR35 on a case-by-case basis, rather than adopting wide, blanket determinations for workers.
Such approaches can leave businesses open to challenges from individuals unhappy about their determinations and also from HMRC, which may disagree that all workers should be given the same classification.
End-users are obliged to conduct status determinations for their workers and produce a Status Determination Statement (SDS), which is a comprehensive statement declaring the worker's deemed employment status for IR35 and the reasons the client has made for reaching this conclusion.
SDSs have to be communicated to the worker.
Under the new IR35 legislation, there is an obligation on end-clients to take "reasonable care" when making status determinations.
HMRC has given very little guidance as to what constitutes "reasonable care", but blanket determinations are unlikely to meet the test.
Workers should first discuss their SDS with their end-clients if they feel their status has been wrongly determined.
6. What steps can I take to ensure I don't get caught out by IR35?
Don't wait for HMRC
The key point is that, from 6 April 2021, all businesses using off-payroll workers are caught by IR35– so do not take the risk of assuming the new rules do not apply to your company.
If you think you may be covered by the small company exemption, check your records carefully against the criteria set out above.
Ascertain your role in the supply chain
All businesses that operate in supply chains where off-payroll workers are involved should ascertain what their role in the chain is and what rules apply to them – this requires supply chain mapping and working out which entities sit either side of you.
Check out what resources are available on government and advisers' websites to assist you.
Check your processes
Once you have collected your data, think about how you are going to process it and communicate your decisions to others in the supply chain.
Remember that IR35 is not a one-off compliance exercise. From 6 April 2021, businesses need to regularly (at least once every 12 months) review their working practices and check whether there have been any changes that affect their compliance status.
Don't forget about employment law!
Finally, don't forget about employment law! If you start treating a worker as an employee for tax purposes they may assert employee or worker status for employment law purposes and make a claim for employment rights – such as holiday pay, sick pay and pension contributions. This situation needs to be carefully managed.
For more information about complying with IR35 and dealing with HMRC disputes, contact a member of Fieldfisher's IR35 team, use our IR35 Practical Checklist or ask for details about our IR35 Status Determination Tool.
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