IR35 Changes impacting the housing sector

Are you ready for April 2021?

Following the outbreak of Covid-19, The IR35 Off Payroll Working rules were delayed until 6 April 2021. As organisations start to gradually return and adapt as the Government begins to open up the economy again, this will become a key risk to manage and ensure robust processes and controls are in place. There has been further discussion in parliament and the House of Lords but it does not appear that there will be any further delay to the introduction – therefore be ready for April 2021.

This impacts on housing associations. Not all, but it will impact those who meet the medium & large test - this looks at total Group turnover (over £10.1m), Balance Sheet (over £5.2m) and employee numbers (over 50). Most housing associations will meet two out of these three tests and therefore will need to take action.

What is IR35?

IR35 is commonly used as the term to signify a review into employment status from a tax perspective.

Under IR35, individuals engaged via personal service companies (PSC's) would be required to pay income tax and NIC on the fees they have received from companies where HMRC deem their role to be one of employment rather than self-employment.

This was the PSC's obligation and responsibility to settle if HMRC found fault, not the engaging end client company. This structure was therefore used commonly to:

Reduce costs for the engager;
Create tax advantages for the worker given they could distribute by way of dividends
Protect the end client from a HMRC challenge; and
Enable the worker to be commercial and entrepreneurial.

However given the rise in these types of companies HMRC put the IR35 legislation into place in 2000 to investigate payments that were really in respect of “disguised employment”. HMRC though struggled to investigate these (volume and capacity) and therefore in 2017 introduced new rules into the public sector and these are now being extended to the private sector and housing associations from April 2021.

What is changing?

As above, HMRC has struggled over the years to challenge the employment status of those workers engaged through PSCs.

Therefore, they have changed the rules to make the end client responsible for assessing the employment status of the worker and for any income tax / NIC due. This is a significant change.

Effectively, the end client will help HMRC police this arrangement given that it will no longer be up to the PSC to decide if IR35 applies. Instead of chasing hundreds of thousands of PSCs, HMRC will now only have to go to the larger end client to challenge which will increase transparency and efficiency for the Government, as well as potentially increase PAYE / NIC payments. For reference, it was estimated that an extra £450m has been collected since these rules were introduced into the public sector.

What is not changing

What is not changing is how employment status is assessed. This is being assessed in exactly the same manner as before, using the same factors, including:

Financial risk
Equipment
Mutuality of obligation
Control
Substitution
Part and parcel
In Business in own account

Therefore, just because the responsible party changes, why should the assessment? There may be an obvious answer to this but it is a key question given that this will change the arrangements in place and add costs to all those in the supply chain as well as change relationships within the supply chain.

What needs to be done?

Three things need to be done to get IR35 / off payroll ready:

Train and gain knowledge on the IR35 changes
Identify engagements within the scope of an IR35 assessment
Carry out a “Status Determination Statement” (SDS) and provide it to the worker to confirm if they are inside or outside IR35. It will be important to identify a consistent approach to this to demonstrate reasonable care - using HMRC’s CEST online assessment is not mandatory and may not achieve this for you. We help clients by utilising our own status assessment technology to ensure clients have robust controls in place and can make decisions which are effective and compliant for all parties.

If the decision reached is that the engagement is outside IR35, they it can continue to be paid off payroll. If inside, the fee payer will need to deduct PAYE and NIC.

We are working with a number of housing associations and can share our experience and help you prepare. One key aspect for the housing sector has been how this change interacts with the Construction Industry Scheme, particularly as we gear up to the Domestic Reverse Charge introduction in March 2021.