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Understanding IR35, CEST, and the new April 2020 rules

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How do the April 2020 rules affect IR35?

New rules will apply to IR35 legislation from April 2021 affecting contractors who offer their services through a Personal Service Company (PSC), as well as medium and large businesses in the private sector that hire them. The measure was originally due to come into force in April 2020, however, following the COVID-19 pandemic, it has been delayed to April 2021. 

The changes mean more responsibility is taken on by these businesses, but it’s feared the new rules could also lead to higher tax bills for contractors. So what are the changes to be made and their implications in more detail?

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IR35 changes from April 2021

From April 2021, medium and large organisations operating in the private sector that hire contractors to work with them will need to determine their employment status before taking them on.

This will be done using HMRC’s ‘check employment status for tax’ tool, or CEST. The decision is made based on a number of factors including, but not limited to, whether or not the contractor:

  • Is able to offer a substitute in the event they’re unable to carry out the work themselves on any given day – this is known as having the ‘right of substitution’
  • Uses only technology or equipment that’s the property of the end-client
  • Has to comply with the working hours or days demanded by their client – known as the ‘degree of control’
  • Has a right to take on other clients at the same time as working with this business

Previously, the contractor made the judgement on their own employment status, apart from when the end-client was a public sector company. The new rules only apply to medium to large organisations in the private sector, however, not smaller businesses.

CEST tool

HMRC’s CEST tool used to determine a contractor’s employment status is currently being updated following criticism of its capabilities. The world of contracting is complex, and with many potential variations in a working scenario, the resource has been viewed as too simplistic to be wholly reliable.

Although HMRC officials have said they’ll uphold the results delivered by CEST in its current format, an updated model may be better placed to deal with the complications inherent in some contractor hire scenarios.

What are the implications of IR35 changes?

The most obvious effect of the new IR35 rules is the potential for higher tax liabilities for contractors. They face paying the same levels of tax as an employee of the company that hires them, but without the associated benefits and security.

If their end-client determines they fall inside IR35 rules, their take-home pay will drop, and they’re likely to have to increase their own fees to compensate for this. The situation could also trigger an investigation into previous decisions made by their Personal Service Company, with the potential for significant retrospective tax bills.

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The end-clients involved may decide to take the stance that all contractors they hire fall inside IR35 legislation as far as tax is concerned. Even though they’ll have to pay employer National Insurance Contributions (NICs) as a result, they may come to the conclusion that safeguarding their tax position comes first so they aren’t also targeted for HMRC tax investigations.

If the changes to IR35 legislation or the CEST tool are likely to affect you, our team of experts at Real Business Rescue can provide the professional advice you need. We have extensive experience of dealing with HMRC and understand their systems and procedures. Please call to arrange a free same-day consultation at any one of our large network of offices around the UK.

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