Do you use off-payroll workers in your business? Take a note of these changes to the IR35
22 FEB 2022
What is IR35 and why does it matter?
Essentially, IR35 is an anti-avoidance tax rule which targets the use of so-called ‘Personal Service Companies’ (PSCs) to avoid paying employment taxes. A PSC is generally a limited company, the sole shareholder of which is its director, who instead of being directly employed by other businesses, operates exclusively through their own company. Practically, this meant that before IR35, where an individual contractor is engaged by a company ‘off-payroll’ through their PSC, the PSC contractor could technically facilitate employment tax savings, whilst the engaging business was not required to pay employer national insurance contributions
IR35 changed this and aimed to ensure that when a business engages an individual through an intermediary such as a PSC they pay the appropriate tax (when the individual would have been considered an employee for tax purposes ,if the PSC did not exist and they had been employed directly, then they should be taxed as an employee).
There have been some recent changes to the IR35 regime which will affect a large number of businesses. Under the previous regime, the PSC was responsible for assessing their tax status and accordingly paying any employment taxes if they were deemed to be captured by the arrangement.
However, this changed in April 2021, primarily to respond to reports of widespread non-compliance. The government decided to shift responsibility for assessing the PSC individual to the business that engaged them, rather than letting them do it themselves. The engaging businesses, therefore, are responsible for determining the PSCs’ employment status and paying Income Tax and NICs for those who are deemed to be employees or workers. This rule came into effect last April, but there is a period of grace for implementation which is set to end in April 2022, during which time HMRC have said they will not impose penalties on businesses who made genuine mistakes. Importantly IR35 has – and still does – exclude small companies who are exempt from assessing PSCs.
Why compliance is crucial
Some recent examples of HMRC – responsible for IR35 – enforcing the rules to public sector organisations should provide a stark warning to businesses and organisations captured by the new rules.
HMRC’s enforcement so far
HMRC have found that both the Home Office and the Department for Work and Pensions breached the rules, and they have been awarded subsequent tax bills with interest chargesrespectively.These instances of Government departments being caught unawareness demonstrates the relative complexity of these rules.
Why is it so difficult to understand and get right?
The 2021 rules made no material changes to the test it uses to determine employment tax status, which show whether or not a PSC contractor falls inside IR35. The test, however, is complicated and can often lead to uncertainties regarding the tax status of contractors.
The issue with the test is that it is not really a test as such, but a combination of methods. Businesses must determine employment tax status through how it has developed in caselaw, meaning they need to consider a host of issues that include: whether the PSC contractor can provide a substitute to work on their behalf; the level of control that the client (i.e. the engaging business) exerts over the individual; and whether mutuality of obligation exists between the parties. The ‘practical reality’ of any arrangement will be looked at rather than whatever written contract exists.
Recent cases concerning employment tax status demonstrate that even tribunals can mis-categorise workers’ status as they pertain to the IR35 rules. For example, in a recent case HMRC v Professional Game Match Officials Ltd  the Court of Appeal in its judgement concluded that both the Upper Tribunal and First Tier Tribunal had erred in law with regards to the mutuality of obligation point.
What can you do about it?
If your business engages with contractors that you hire directly, i.e. you have ‘off-the-payroll’ staff, you are likely to already be captured by the IR35 rules and be responsible for ascertaining their employment tax status.
Despite the above, there are steps you can take. Fortunately, in response to complaints about the uncertainty of the rules, HMRC has developed the ‘Check Employment Status for Tax (CEST)’ online tool which aims to consolidate all of the relevant considerations and give a definitive answer. The tool, however, has been criticised as it can only produce a result in approximately 85% of the circumstances.
The good news is that if you are given a CEST result, HMRC has confirmed this is definitive and will hold up as evidence. Using the tool, therefore, should in general reduce the risk of being subject to a potentially damaging HMRC enquiry and furthermore satisfy the requirement to take reasonable care when making status determinations if such an enquiry takes place.
To conclude, the best step your business can take is to use the CEST online tool. The tool should be used in conjunction with exercising careful judgement, seeking legal advice and recording any decision-making processes – particularly in complex cases – to reduce risks.
Yulia BarnesManaging Partner
Yulia Barnes is our Managing Partner. She is an experienced solicitor and advises on a wide range of contentious and non-contentious matters for both private and corporate clients.Yulia started her legal career at a large international Magic Circle firm. She then became a partner at a regional law firm and headed a Dispute Resolution Department. She then moved in-house before starting her own Boutique practice, Barnes Law, with the aim of providing exclusive services to high net-worth individuals and privately-owned businesses. More details can be found on her LinkedIn profile.
Expertise Yulia and her team are widely recognised for their professional and practical approach to matters. She is committed to ensuring that her clients’ objectives are achieved in the most cost-effective way possible.
Approach Yulia has a wealth of experience working with businesses of all sizes: from large multinational corporations to start-ups. She has particular expertise in a hospitality industry, investment funds, private and corporate clients, and focuses on startups and technology-driven companies. Yulia brings the same level of attention to detail, professionalism and a personal touch to every case and client, and truly immerses herself in her clients’ businesses. She prides herself on her problem-solving, commercially astute approach and her track record of partnering with clients to help them achieve their strategic objectives.
Will joined Barnes Law as an Associate Solicitor in Spring 2023, shortly after qualifying in September 2022.
Will works mostly on real estate and corporate/commercial matters. Will enjoys providing advice on transactional matters.
Away from the office, Will can be found reading or playing golf. While he played rugby until university, and rowed throughout his degree, he now tends to watch both from the sidelines. During the winter he can also be found skiing.
Will plans to continue developing his legal skills and experience at Barnes Law, under the expertise and guidance provided by Yulia.
Mark is an experienced solicitor whose practice areas include intellectual property (IP), IT, data protection and general commercial law.
Mark advises businesses of all sizes – from sole traders to corporations. Among his clients are: clothing and lifestyle brands, restaurants and food suppliers, IT companies, banks, hedge funds and venture capital firms, education providers, medical and pharmaceutical brands.
Outside of his practice, Mark also advises members of the Institute of Directors as part of its Directors’ Advisory Service.
- Prosecuting a UK trademark application on behalf of an education provider and representing them in related UK IPO opposition and revocation proceedings;
- Advising a publisher and a delivery business on data protection matters, B2B and B2C Ts & Cs of sale, website and app Ts & Cs, all aspects of global brand protection;
- Advising footwear brands, alternative asset managers and hedge funds on their global brand protection, including overcoming various refusals, representing them in opposition proceedings and settlement negotiations;
- Representing a central bank in opposition proceedings before the UK IPO;
- Advising a lifestyle brand concerning trademark clearance and protection, negotiations for a website/app development and maintenance agreement.
Ioulia TatawatFamily Law Adviser
Ioulia has a solid background in family law and offers guidance, clarity, and support to clients during one of their most challenging times in their life.
She advises on all three pillars of separation: divorce, children matters and financial settlements. Ioulia is a member of Resolution and is keen to try to settle matters at early stages.
Ioulia is dedicated to assisting clients and navigating them through their legal matters with clarity and support.
Alex joined Barnes Law in September 2023 after finishing his master’s degree in law. Prior to joining Barnes Law, Alex worked in property litigation at Ashfords. Alex assists Yulia on a variety of both contentious and non-contentious matters.
Outside of the office, Alex enjoys reading and hiking. Prior to working in law, Alex was a competitive tennis player.
Alex continues to develop his skills in legal practice under Yulia’s guidance, he plans to sit the Solicitor’s Qualifying Exams (SQE) in 2024.
Mehves joined Barnes Law in August 2023, right after graduating from Queen Mary, University of London (LLB Senior Status). As part of her qualification journey, Mehves is currently pursuing her Legal Practice Course (‘LPC’) at the University of Law. She also holds a degree in European Union Law from Maastricht University, Netherlands.
Mehves works closely with Yulia on a variety of contentions matters and also writes Barnes Law’s legal blogs, manages social media accounts and is responsible for marketing.
Outside of work and studies, she enjoys running, tennis and yoga.
Mehves is looking forward to developing her legal skills at Barnes Law.
Julia PodgornovaInvestor Relationship Manager
Julia guides clients in making important business decisions based on comprehensive risk assessment and strategy. She supports investors in devising strategies designed to maximise each business’s potential from pre-seed to IPO.
Julia’s particular area of expertise are IT start-ups at different stages. Julia supports business through their fund-raising journey. As an Investor Relations Manager, Julia communicates with investors to facilitate a smooth round and legal part of each transaction.
In her free time Julia enjoys sailing, ballroom dancing, art exhibitions and travel.