August 16, 2021

DWP missing payment of IR35

Contractor

Rules under IR35

Under IR35 if a contractor carries out work for a client via an intermediary such as a personal service company, the client is required to consider whether, if the intermediary was removed from the relationship, the contractor would effectively be akin to an employee. Where contractors are carrying out similar roles to employees and being treated as if they were an employee in terms of things like pay, hours, the level of control and a requirement to provide personal service, it is a requirement that tax and national insurance are deducted.

When the IR35 legislation was introduced in 2000, it was the contractor’s responsibility to declare their own tax status. However, since 2017, and in an attempt to resolve party non-compliance, this responsibility shifted in the public sector to the end hirer.

As of April 2021, these changes also apply to certain private sector businesses.

Immediate consequence for business

Many private sector businesses are now caught by the same rules that DWP fell foul of. The costly mistake should be used as a learning opportunity, especially for businesses which are relying solely on the HMRC’s CEST in order to assess the status of their own contractors.

CEST is free, and therefore appealing to business owners. However this mistake by the DWP demonstrates how reliance on just the CEST system may not protect them. Business owners require a general understanding of employment status in order to ensure that they answer questions correctly when using CEST.

IR35 only applies where there is an intermediary involved but status issues also apply where individual contractors are engaged directly. Getting status wrong in this situation can also lead to challenges from HMRC as well as disputes from individuals who may allege an entitlement to worker or employee rights.

Which private sector businesses are affected by IR35 in 2021?

Subject to the anti-avoidance provisions, ‘small’ private sector end-users are exempt from the changes that came into force in April 2021. For ‘small’ businesses, the contractor remains responsible for determining whether IR35 applies and the fee payer can still pay a gross salary amount.

Private sector businesses have to comply with IR35 rules from the start of the tax year following the accounting filing date for the second financial year, so long as at least two of the three following conditions apply:

  1. Annual turnover of more than £10.2 million;
  2. Balance sheet total of more than £5.1 million; and/or
  3. More than 50 employees.

How RWK can help

The fact that the DWP failed to correctly assess the status of its contractors, despite relying on the HMRC’s CEST tool, demonstrates how it is key for medium and large business owners to understand the ins and outs of IR35

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