Although the legislation that will change the off-payroll working rules from next April is still in draft form, the government issued guidance in August encouraging clients that engage individuals through personal service companies (PSCs) to start preparing for the changes now. You can find the guidance here
IR35 potentially applies to individuals engaged via a PSC. It is broadly designed to prevent individuals who would be employees if they were engaged directly by a client from paying less tax and NICs than would otherwise be the case. Until now it has been the PSC's responsibility to decide if an individual would be an employee if directly engaged.
From April 2020 responsibility for determining the employment status of contractors working through PSCs will pass to medium or large private sector clients. Medium or large clients are generally those who meet two or more of the following conditions:
- Annual turnover of more than £10.2m;
- A balance sheet total of more than £5.1m; and
- More than 50 employees.
Once clients have conducted employee status reviews, they must notify both the next party in the contractual chain and the contractor of the outcome and the reasons for it. The next party in the chain could, although will not necessarily, be the PSC. If a contractor disagrees with the determination, the client will have to consider his or her reasons for disagreeing and respond to them within 45 days.
If the client determines that the worker would be an employee but for the interposition of the PSC, in most situations the party that is responsible for paying fees to the PSC will be responsible for deducting tax and NICs and paying these to HMRC. This may be the client or someone else (such as an agency) if there is a longer contractual chain between the client and the PSC.
There are various steps clients should take to prepare for the changes, including:
- Making sure that they have a full record of all contracts to which the new rules potentially apply;
- Reviewing those relationships to establish whether the individuals would be employees if they were not engaged via a PSC and keeping records of the reasons for determinations;
- Putting procedures in place to notify relevant parties in a contractual chain of the outcome of employee status determinations;
- Implementing procedures allowing workers to challenge determinations and for responding to challenges within 45 days; and
- Ensuring that if working arrangements or practices change, systems are in place for employee status determinations to be reviewed.