Articles

Introduction

With the reforms to the IR35 Off-payroll legislation coming into effect from 6 April 2021, many charities and not for profit organisations may be unsure whether the new tax changes will apply to them and what action, if any, they need to take. Here at Aaron and Partners we answer the key questions you need to know to ensure your organisation is prepared and compliant.

What is IR35?

IR35 refers to the Off-Payroll legislation which was introduced in the UK in the early 2000s in an attempt to tackle tax avoidance. The legislation aims to prevent tax avoidance where individuals who should be recognised as an employee for the purposes of tax, instead, supply their services through an intermediary (such as a personal service company (PSC) like a limited company) and treat themselves as self-employed. In doing this, the individual can avoid liability for income tax and national insurance (NI).

Does it apply to self-employed contractors?

The current position for non-public sector bodies is that the responsibility for assessing and determining an individual’s employment status for tax purposes falls on the individual themselves.

For example, if a charity or not-for-profit organisation (the engager) is engaging an individual through a PSC, the burden is on the PSC/ the individual to access whether they are an employee for the purposes and tax and whether or not they should be paying tax and NI. The charity or not for profit organisation, as the engager, does not currently have any requirement to assess employment status, nor do they have any tax liability should HMRC disagree with the assessment.

For public-sector bodies who meet the requirements (including some charities and non-profits such as national museums and many universities), the responsibility to assess and determine an individual’s employment status and pay the correct tax accordingly is on them and not the PSC or the individual.

What are the changes coming into force in April 2021?

From 6th April 2021, this is set to change. The government is reforming the IR35 rules in the private sector, to bring them into alignment with the rules in the public sector. From 6th April 2021, all medium or large-sized private sector organisations will be responsible for determining the worker's employment status for the purposes of tax. This includes charities and not for profit organisations that meet these criteria.

To classify as a small organisation for the purposes of IR35 and therefore be exempt from the updated legislation, a charity or not for profit organisation must meet at least two of the following criteria;

• Annual turnover of £10.2 million or less
• £5.1 million on your balance sheet or less; and
• 50 employees or less.

If your charity or not-for-profit organisation does not meet at least two of these criteria, then they will be classed as a ‘medium or large-sized business’ under the Companies Act 2006 and the updated IR35 legislation will apply.

Following the change, it will be the burden of the engager (charity or not for profit organisation and not the individual) to assess and determine the individual’s employment status for tax purposes and to pay the PSC appropriately.  The engager will also now be liable should HMRC deem the determination incorrect.

Should there be other parties in the supply chain between the engager and the PSC, such as an agency, it is still the responsibility of the engager to assess and determine the employment status. The below diagram shows how the ‘engager’, the one receiving the services directly will now be the one responsible for determining the employment status of the individual regardless of how many organisations are between the engager and the individual in the supply chain. The engager is then required to pass the outcome of their assessment down to the company paying the fees to the PSC, which would usually be the agency. Should the agency be unable to pay the tax for some reason, the liability then falls back to the engager (or the next in the supply chain should there be more than one agency involved).

What are the consequences of not complying?

Should an organisation fail to analyse the relationships that they have with their contractors and refuse to provide employment status determinations, or indeed make incorrect determinations without proper consideration, then there is a risk that they will be subject to large financial penalties from HMRC.

Following the incorporation of the updated legislation, HMRC will have the power to investigate the employment status of off-payroll workers in the private sector (including charities and not for profit organisations which fall under the criteria) and issue a notice requesting the unpaid NI and PAYE tax should they find that an organisation has incorrectly categorised the employment status of one of their workers.

In addition to the outstanding NI and PAYE, HMRC also has the power to issue late payment fines and interest to the engager, along with a penalty that can be up to 100% of the outstanding liability. This penalty will be based on the circumstances as a whole, taking into account what steps have been taken by the engager in order to determine the employment status of the worker.

Further to the cost consequences above, there is also likely to be reputational damage to the charity or not for profit organisation and a competitive disadvantage.

How do we prepare for this?

Charities and not-for-profit organisations in the private sector who were previously exempt from the legislation should consider whether they will be caught by the new reforms. If your charity or not for profit organisation is acting as an engager or agency, it is highly recommended that you scrutinise your business relationships with the PSC’s you engage with.

Even in situations where there are written contracts that demonstrate that there is no employment relationship for the purposes of tax, remember that HMRC will look beyond this and look at the true nature of the working relationship.  If the contract does not reflect the true position, it may be disregarded.

In order to prepare for the new rules, engagers and agencies should do the following:

• Conduct a full audit and review of your business relationships with any contractors that you engage with in order to consider and determine whether any of these will be subject to the legislation.
• If contracts exist, consider whether they are a true reflection of the working relationship.  If they are not, consider redrafting them to ensure they are more accurate.
• Contact the relevant contractors to discuss the determination of their employment status, so that you can iron out any disputes in relation to this prior to the legislation coming into force, or as soon as possible thereafter.
• Prepare and update your payroll and HR systems for a potential change in the way, you need to pay contractors.
• Prepare and budget for the increased costs potentially involved as contractors may wish to raise their prices in order to take account of the tax to be paid.

If you have any queries in relation to the changes coming into force in respect of HMRC off-payroll working (IR35) please do not hesitate to contact Debbie Coyne at [email protected]