Understanding IR35, CEST, and the new April 2020 rules

How do the April 2020 rules affect IR35?

From April 2021, new rules will impact IR35 legislation, affecting contractors using a Personal Service Company (PSC) and the medium to large businesses in the private sector hiring them. Originally scheduled for April 2020, the implementation was postponed due to the COVID-19 pandemic.

These changes shift more responsibility onto businesses, but concerns have been raised that the new rules might result in higher tax bills for contractors. Let’s delve into the details of the changes and their implications.

 

IR35 changes from April 2021

Starting from April 2021, medium and large private sector organisations hiring contractors will be required to determine the employment status of these individuals before engaging their services.

This determination will be facilitated by HMRC’s ‘check employment status for tax’ tool, known as CEST. The decision will be based on various factors, including but not limited to whether the contractor:

• Can provide a substitute if unable to perform the work personally on any given day, known as the ‘right of substitution’
• Utilises technology or equipment owned by the end-client
• Must adhere to the working hours or days specified by the client, referred to as the ‘degree of control’
• Has the right to engage with other clients concurrently

Previously, contractors made the judgement on their own employment status, except when the end-client was a public sector company. These new rules specifically apply to medium and large organisations in the private sector, excluding smaller businesses.

 

CEST tool

HMRC’s CEST tool, employed to ascertain a contractor’s employment status, is presently undergoing updates due to criticism of its capabilities. The contracting landscape is intricate, with numerous potential variations in working scenarios, and the tool has been deemed too simplistic to be entirely reliable.

While HMRC officials have committed to standing by the results generated by the current version of CEST, an updated model may be better equipped to address the complexities inherent in certain contractor hiring situations. 

Read More:

• IR35: How the Public and Private Sector reforms affect contractors
• IR35
• Dedicated advice for freelancers and contractors
• IR35: How this could affect you and your company

 

What are the implications of IR35 changes?

The primary impact of the new IR35 rules is the likelihood of increased tax liabilities for contractors. They may find themselves paying equivalent tax rates to employees of the hiring company, but without the accompanying benefits and job security.

If their end-client categorises them as falling within IR35 rules, their take-home pay will decrease, and they might need to raise their fees to offset this loss. This situation could also prompt an examination of previous decisions made by their Personal Service Company, potentially leading to substantial retrospective tax bills.

The end-clients involved may adopt the stance that all contractors they engage fall within IR35 legislation for tax purposes. Despite having to cover employer National Insurance Contributions (NICs), they might prioritise securing their tax position to avoid potential HMRC tax investigations.

If the changes to IR35 legislation or the CEST tool are anticipated to impact you, our team of experts at Vanguard Insolvency can offer the professional advice you require. With extensive experience in dealing with HMRC and a deep understanding of their systems and procedures, feel free to call us for a free same-day consultation at any of our numerous offices across the UK.