The UK’s off-payroll working rules (known as IR35) were updated across the public sector in 2017 and these changes are scheduled to be extended to all private sector businesses from April 2021. This has left many of the country’s life science organisations – as well as those from other industries – feeling concerned about the potential costs they will face, both financially and in terms of what this will mean for their contract workforce.
In reality, as long as the most recent IR35 rules are well-understood and complied with, genuine contractors and their clients will not be penalised by the legislation. This article aims to address concerns surrounding IR35 and help UK life science companies assess if they will be affected by the 2021 IR35 reforms, and how it may impact the business.
To help you gain a better understanding of the off-payroll working rules, Proclinical has developed a guidebook packed full of research and insight that will help you understand the legislation changes and how you should prepare for them.
What is IR35?
In 2000, HM Revenue and Customs’ (HMRC) implemented IR35 legislation in an effort to ensure fairness in tax and National Insurance contributions between individuals who work in a similar way.
IR35 is a piece of anti-avoidance tax legislation that is designed to assess whether a contingent worker (contractor, freelancer or consultant) engaged by a client is genuinely an independent worker or the company’s ‘disguised employee’.
In the case of a ‘disguised employee’, the contractor is for all intents and purposes behaving as an employee but enjoying tax efficiency by claiming pay through an intermediary, known as the contractor’s Personal Services Company (PSC). This is often a limited company. Simply put – would the contractor be an employee if the intermediary did not exist?
The legislation has changed over the years notably in 2017 with its new interpretation for the Public sector and now it’s planned changes for April 2021.
Who does IR35 apply to?
In the life science industry, IR35 rules apply to both contingent worker – commonly referred to as a contractor – and the life science company that engages them – known as the ‘end hirer’. It will also affect intermediary fee payers – normally an agency – who will make the necessary deductions and declarations prior to paying the contractor.
When does IR35 come into effect?
The updated IR35 legislation that was announced in 2019, is currently planned to come into effect on 6th April 2021.
How does IR35 work?
Contractors and organisations will only be affected by IR35 if they fall within predefined conditions of employment that signal that they are acting as a regular employee, rather than an independent worker. IR35 legislation is, therefore, put in place to stop contractors avoiding paying certain tax liabilities.
What does inside or outside IR35 mean?
If a contractor is ‘inside IR35’ this means that, according to the HMRC, they are a ‘deemed employee’ and behave much like a regular employee. In this case, the client will be responsible for deducting the relevant income tax and NICs for HMRC on behalf of the contractor, prior to paying them their fee. This is also commonly known as being ‘caught by IR35’.
If a contractor is ‘outside IR35’ then they have been proven a genuine contractor that is providing a service to a life science company. In this instance, the end hirer will not have to deduct any additional taxes.
What are the major IR35 reforms in 2021?
The 2021 IR35 legislation reforms will mean changes for both parties, but there are some significant implications that will particularly affect the ‘end hirer’. Below is a brief summary that will most impact life science companies:
- The responsibility for determining whether a contractor is inside or outside of IR35 will now fall to the ‘end hirer’ rather than the contractor themselves
- The ‘end hirer’ must take action to assess the contractor’s employment status
- Both medium and large companies are now required to assess their contractors’ employment status
- The ‘end hirer’ must implement a ‘client led disagreement’ so that contractors can review their employment status if they think the determination is incorrect
- The ‘end hirer’ will be liable to pay any unpaid taxes or fines if they do not:
- Make a determination and therefore, do not pass it to the fee payer
- Use reasonable care in determining the contractor’s employment status
- Process payment according to the ‘end hire’ determination
How much will IR35 cost UK life science businesses?
According to HMRC, one-off costs could include familiarisation with the changes, upskilling staff in making status determinations and determining whether the rules apply to their existing off-payroll engagements. Ongoing costs could include making status determinations for any new off-payroll engagements and maintaining a status disagreement process for off-payroll workers who seek to challenge their status determination.
There may be further costs to businesses whose contract workers are deemed inside IR35. These will vary significantly from one business to the next and depend on how they, and their individual contractors, choose to operate going forward. Their workers, who have to pay additional tax, could find they have less take-home pay and may seek an uplift or consider other options.
How do life science organisations determine who is inside or outside IR35?
Organisations using contract workers may determine whether a contractor is inside or outside IR35 by using the below guidance provided by the HMRC, however they are not always clear in every instance. Our downloadable IR35 guidebook is designed to help companies with clarification around these rules and provides examples of real-life legal cases where determinations by HMRC have been successfully challenged, setting a precedent that will help guide you in your decision making. The indicators used to identify workers inside scope are:
Supervision, direction, control:
This test helps determine whether a contractor is inside or outside IR35 by finding out how much supervision and control the life science company has over the contractor. For example, if there are mandatory hours of work, or considerable control over where and how the work is carried out. This usually indicates that the contractor is inside IR35.
Mutuality of obligation (MOO):
Mutuality of obligation is when a life science company is obliged to offer work to a contractor, and the contractor is obliged to accept the work.
If another contractor or interim worker cannot be substituted in to carry out the work, then the original contractor is likely to be within IR35
‘Part and parcel’:
A contractor will likely be considered inside IR35 if there is evidence that they are a fixture within the life science company’s structure. An indicator of this is if the contractor has people within the business reporting to them
Provision of equipment:
Another way to be potentially ‘caught’ by IR35 is if the life science company provides the contractor with the tools, provisions or equipment they need to carry out the work.
If the contractor is only working for one company instead of with multiple clients as self-employed workers usually do, then this could suggest that they are behaving like an employee.
How can I find out if IR35 applies to contract workers in my business?
HMRC provides a means to help companies determine whether their contractor workers are caught by IR35 – the Check Employment Status for Tax (CEST) tool. However, there has been much controversy over the CEST tool’s accuracy. Critics claim that it fails to take into account some significant factors needed to determine a contractor’s correct employment status. This has led to thousands of contractors being incorrectly ‘caught’ by IR35 and paying unnecessary and often hefty fees.
Here at Proclinical, we have the technology and expert support to provide you with a robust and reliable status determination for your existing contractors and future roles before you hire to give you peace of mind before you hire.
- More comprehensive review than HMRC’s CEST tool
- Borderline cases reviewed by the UK’s foremost IR35 tax experts
- Detailed report detailing how each aspect of the role determines its status
- Status determination backed by legal defence team and insurance against losses
- Support with job descriptions to reduce your risk
How else can Proclinical help life science companies comply with the 2021 IR35 requirements?
If you feel your life sciences business needs more help in understanding IR35 and how to get ready for the changes, we recommend reading our guidebook: Understanding UK Off-Payroll Working Rules – IR35.
We are able to utilise our specialist skills and expertise in advising both businesses and individuals in relation to the new rules and the steps they need to be taking. To find out more get in touch with our team at IR35@proclinical.com.