IR35 soft landing period and implications for contractors

The new IR35 off-payroll rules for medium and larger-sized businesses came into effect on 6 April 2021.

If you're a contractor working through an intermediary such as a personal services company (PSC), the new legislation will come as no surprise.

After all, the original IR35 legislation more than two decades ago placed the emphasis on contractors to understand their status.

However, this changed in April 2021 due to new legislation, as we discuss below.

But it seems the story is still being written. In mid-February 2021, the government announced a new 'soft landing' period that would mean it would take a lenient approach to penalties for the first year.

What does this mean - and how does it affect contractors? We cover that in this article, which offers answers to the following questions:

In a nutshell: What do the new IR35 rules mean for contractors?

How do I determine my IR35 status as a contractor?

Does the new IR35 legislation apply to a client I work for?

What if a contractor disagrees with an IR35 SDS determination?

What does the IR35 soft landing period mean for contractors?

Do contractors who work for umbrella companies need to undertake IR35 determinations?

In a nutshell: What do the new IR35 rules mean for contractors?

The new IR35 requirements are relatively simple for those contractors who use an intermediary such as a PSC in order to work for clients.

In fact, it simplifies life a little although in doing so removes some freedom from the hands of contractors.

As of 6 April 2021, the following methods are used to determine a contractor's employment status, depending on the type and size of the business you're working for:

• Public sector authorities: The client is responsible for determining if you should be on or off the payroll. This has been the case since April 2017.
• Medium and large-sized private businesses: Again, the client is responsible for determining the IR35 status. This is new as of April 2021.
• Smaller businesses: As the contractor, you remain responsible for determining your status when it comes to IR35.

Hopefully, by this point, any medium or large-size client you contract for should have been in touch about determining your employment status.

If not, you should contact them immediately.

How do I determine my IR35 status as a contractor?

It's good practice for the business to undertake the assessment this with you present (virtually or otherwise), because they might assume incorrect answers to questions that only you can answer.

Either way, you can use HMRC's Check Employment Status for Tax (CEST) tool yourself to try and determine your status.

Once the assessment has been completed, they must provide you with a Status Determination Statement (SDS), which will outline what they believe your status to be, and explain why.

You should keep this.

Notably, all of this applies even if you work for an agency, or through them. The business will still have to create and issue the SDS, but it will be handed down the chain to the agency, and then to you.

Therefore, if you haven't received an SDS and work via an agency then you should speak to the agency first and foremost to request it.

Does the new IR35 legislation apply to a client I work for?

Ultimately, it's for the business to decide whether the new IR35 legislation applies to them. But as a contractor, it might be worth undertaking your own investigations.

Generally speaking, the rules for identifying a medium and large-sized business follow those set out in the Companies Act 2006, section 382.

This means a limited company is probably considered medium or large-sized if two or more of the following apply in a given financial period and also applied for the prior period:

• Annual turnover is more than £10.2m
• The balance sheet total is more than £5.1m
• The average number of employees is more than 50.

If a business is unincorporated then only the turnover figure above is used to make the identification under the simplified test rules.

You may find the above information is publicly available in published accounts.

What if a contractor disagrees with an IR35 SDS determination?

If a contractor disagrees with an SDS - most likely because it determines that they are a deemed employee - then many contractors have stated they'll simply withdraw from the contract and seek employment elsewhere.

However, there's an appeals process. They can contact the client explaining why they disagree and lodge a formal dispute.

They then have to respond within 45 days, although during this period they will apply the employment status as they determined it (eg, they or the agency will continue to run your payments through their payroll if you are a deemed employee).

The business, agency or other fee-payer should have a process in place for this.

However, it's worth noting that HMRC does not get involved in this process, and it remains to be seen if contractors will utilise any kind of legal redress.

What does the IR35 soft landing period mean for contractors?

In February 2021, HMRC took the step of declaring that there won't be any penalties for the first 12 months of the new IR35 rules (unless there's evidence of deliberate non-compliance).

Alas, this doesn't apply to contractors. It only applies to clients, agencies and other types of fee payers you work for.

This is because HMRC considers these to be the ones who will primarily be burdened with additional responsibilities following the new legislation.

In theory, contractors should be fully aware of IR35 as an ongoing process and their compliance with the IR35 are covered in existing legislation.

The clients you work for should not be using the soft landing period as a way to delay your SDS. If this happens, you should contact them in the first instance, and possibly even contact HMRC.

In fact, HMRC said in the same announcement that it may contact businesses to help them understand how to apply the changes, with the aim of helping them meet their obligations.

Do contractors who work for umbrella companies need to undertake IR35 determinations?

There's been some confusion caused by the wording of the Finance Act 2020.

This appeared to indicate a much wider scope for those affected by the new IR35 requirements, and this seemed to include umbrella companies, agencies and employers seconding employees to clients.

HMRC has admitted this was mistaken and that it intends to repair the error in the upcoming Finance Act 2021.

However, you may have been erroneously contacted by clients who have not yet realised this. You should speak to them to discuss the matter.

To be clear, as of April 2021, the only time a contractor should determine their IR35 status is if they're working for a small private business client.

Conclusion: Advice on IR35 for clients

Dealing with an SDS that you agree with can prove expensive in administrative time, and it might feel as if the best plan is simply to move on to a different client.

But this too brings its own administrative overhead, and could burn bridges behind you.

You should certainly speak to the client first and challenge an SDS you feel shouldn't apply to you.

Additionally, it might be that by adjusting your working processes or patterns, or the nature of your work, you can once again be validated as being an off-payroll worker.

While red tape is always a hassle in business, this is one situation where spending time attempting to find a solution all parties are happy with will ultimately bring the best outcome.

Editor's note: This article was first published in March 2021 and has been updated for relevance.

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