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IR35: Off-payroll working rules for the education sector

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Any organisations in the education sector who have off-payroll workers (contractors) must comply with IR35 legislation. This article provides an overview of the current legislation and highlights some key considerations HR and Finance departments will need to be aware of.

What is IR35?

IR35, also known as off-payroll working rules, became law via the Finance Act in 2000. It was designed to prevent contractors from working as ‘disguised employees’ by taxing them at a rate similar to employment. It applies to any worker who provides their services directly to the ‘client’ through an intermediary, for example, a limited company, umbrella company, personal service company, partnership or agency. Ultimately, IR35 closes a loophole in the tax system where workers would be able to set up a limited company to pay less tax.

Public sector IR35 legislation 

In 2017, the public sector reform came into effect and the new legislation shifted the responsibility from contractor to public sector ‘client’ to determine whether said contractor is outside or inside IR35. Determining a contractor's tax status requires detailed knowledge of the working arrangements, rather than the contract alone, hence why HMRC were keen to shift the responsibility and liability to the client. When a contractor is found to be inside IR35 and deemed an ‘employee’, the client is responsible for deducting income tax and employee National Insurance contributions and paying these to HMRC.

Changes to the legislation in 2021 meant clients now need to provide a statutory Status Determination Statement (SDS) to all contracted workers, regardless of whether they are deemed inside or outside of IR35, along with their reasons for coming to this decision. If the contractor disagrees with the SDS and provides their reasons, the client will have 45 days to respond and decide whether to maintain their decision (if they feel it is correct, giving reasons why) or provide a new SDS (if they feel it was wrong). HMRC stipulates ‘reasonable care’ must be taken when completing the SDS as non-compliance can result in the client being responsible for paying the worker’s income tax and employee NI contributions.

Considerations for education providers

When determining the tax status of a contractor, schools must investigate the facts of each individual contract to decide if the IR35 rules apply. School business managers and HR officers should do this by considering what the relationship would be if no intermediary was involved. This should also be reviewed and reconsidered should any arrangements change. IR35 could apply to contracts with sports coaches, music teachers or exam invigilators.

As a starting point, schools can use the HMRC online tool ‘Check for Employment Status Test (CEST)’, which details some of the factors that determine whether a worker may be deemed an ‘employee’, including:

  • Does the school control what services the individual provides and how they deliver them?
  • Does the individual need to bring their own equipment?
  • Is the worker paid on a yearly or termly basis, or as and when work is done… is there any financial risk to the individual delivering the service?
  • Does the engagement include any benefits or reimbursement for expenses?
  • Can the worker use a substitute worker for all or part of the work and, if so, then who pays the substitute?

When making these decisions, it is highly important that detailed, accurate records are kept on file, so that they can be justified.

Support and guidance on IR35 is available through CPC’s HR, Payroll and Employee Screening Services framework.

This framework is contract managed by Dukefield Procurement. For more information, contact [email protected] or 0345 900 2877.

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