From 6 April 2020, the public sector IR35 off-payroll working rules will be extended to the private sector. A consultation was published on 5 March 2019 looking at how the new rules might work in practice.
When does IR35 apply?
IR35 applies if an individual is providing services to a client through an intermediary and would be taxed as an employee if they had been hired directly. The most common type of intermediary is a personal service company (PSC), and HMRC refers to PSCs throughout its consultation paper.
What is the current position?
The PSC is responsible for determining whether IR35 applies and, if it does, for paying tax and NICs through PAYE on the basis that the contractor is an employee of the company. An individual working through their own PSC must themselves determine whether the IR35 rules apply.
Why are the rules changing?
The impetus for change comes from evidence of widespread non compliance: HMRC estimates that only 10% of PSCs that should apply the legislation actually do.
In April 2017 the rules were changed for off-payroll workers in the public sector to make the public body responsible for determining whether IR35 applies and paying tax and NICs if it does; and evidence suggests that this has been successful in improving compliance. The proposals outlined in this month’s consultation use the public sector rules as a starting point but do not mirror them exactly.
How will the new rules operate?
From April 2020, the responsibility for determining IR35 status will shift from the PSC to the client (the organisation receiving the contractor’s services). If the IR35 rules apply, accounting for PAYE and employee NICs shifts from the PSC to the “fee-payer” (e.g. the agency/employment business). The client would be the fee-payer where no intermediary other than the PSC exists.
Who will the new rules apply to?
Large and medium sized businesses (as defined in the Companies Act 2006) that engage individuals providing their services via a PSC. A small (and so exempt) company is one which satisfies two or more of the following conditions:
- Annual turnover of not more than £10.2 million;
- Balance sheet total of not more than £5.1 million;
- Not more than 50 employees.
The consultation paper suggests two options for unincorporated businesses (either apply the new rules to unincorporated entities with 50 or more employees or turnover exceeding £10.2 million; or only to unincorporated entities that have both 50 or more employees and turnover of more than £10.2 million).
All relevant contracts will be affected, even if they were entered into before the legislation is enacted.
Determining employment status
Correctly determining employment status is essential when assessing whether IR35 applies, as the rules do not apply to the genuinely self-employed. To help with this, HMRC have developed an online tool to ‘check employment status for tax’ purposes (CEST). Status for tax purposes and status for employment rights purposes need not necessarily be the same.
CEST focuses on the worker’s responsibilities; who decides what work needs to be done; who decides when, where and how the work is done (including whether there is a right of substitution); how the worker is paid; and if the engagement includes any benefits or reimbursement of expenses. CEST does not cover all scenarios, but there is a commitment to improve and update it prior to April 2020. The consultation does not pose any questions as to how this might be done.
Legislation which has been promised by the government to improve clarity on employment status is unlikely to be in place before April 2020.
Information sharing requirements
HMRC is proposing that:
- At the start of a contract, the client will have to assess the contractor’s status for tax purposes and then provide a status determination both to the party with which they contract and also directly to the contractor, providing reasons on request;
- If the contractor does not agree with the determination they will be able to challenge the decision (although it seems that the final decision is one for the client, with no option of referral to HMRC or an independent arbiter);
- There will be a requirement on all the parties in the supply chain to pass on the client’s determination to the next person in the chain until it reaches the fee-payer;
- If HMRC does not receive the tax due, liability will rest with the first party in the chain that has failed to fulfill its obligations until such time as those obligations have been met – this could be an agency which has failed to send on a determination; or a fee-payer that has received a determination but failed to make the correct deductions prior to payment.
Preparation and forward planning
Early preparation in anticipation of the changes is advisable, such as considering the following:
- Build a full picture and understanding of the contractor population and assess hiring practices (including contracts with employment businesses);
- Assess current contractual arrangements for IR35 risk;
- Establish and budget for the costs of potential increased contractor rates, PAYE/NIC contributions and apprenticeship levies;
- Decide on how to approach the current contractor population and agree any changes to contracts with employment businesses/contractors;
- Consider formulating an internal IR35 policy to ensure consistent policies for future engagements;
- Implement training on hiring contractors, the risks involved and the new policy framework to relevant staff; and
- Carry out an audit of procedures on a regular basis.