IR35 Off Payroll rules for the private sector
The draft reforms for the off-payroll legislation, commonly known as IR35, have now been published by the Government and are contained in the Finance Bill 2019-20. The reforms state that private sector firms who enter into contracts with, or make payments to, workers engaged through a Personal Service Company (PSC) on or after 6th April 2020 will need to check the individual's "deemed" employment tax status.
Where the individual workers’ role looks similar to that of an employee, the firm, agency or third party paying the worker’s company will need to deduct income tax and national insurance contributions (NICs) and pay Employer NICs.
The proposed reforms
The responsibility for determining whether the off-payrolling rules apply will move from the individual worker as it has been up to now, to the organisation or firm receiving the individual’s services.
There is an exemption for “small*” businesses who won’t need to apply the new rules and can leave it up to the individual to determine their own status.
*A small business is a company which meets at least two of the following criteria:
- Turnover – not exceeding £10.2m
- £5.1m or less on the Balance Sheet
- The number of employees does not exceed 50.
The only exception to the small business exemption is if they are a subsidiary of a large or medium-sized parent and in that case will have to comply with the new rules.
Anti-avoidance provisions are being introduced to ensure a business won’t be able to create a situation that artificially gives the small business exemption.
Where an individual worker is deemed to fall within these rules, any payment made to their company by the firm, agency or organisation paying them will be subject to Employment Taxes.
Therefore, any amounts paid to the worker’s company for their services is deemed to be employment income and will be paid to the company after the deduction of tax and employees National Insurance. The payment will also be subject to Employer’s National Insurance. These will have to be reported by the payer and paid over to HMRC under the Real-time information payroll process (RTI).
Client-led disagreement process
A status determination statement outlining the end-client’s IR35 status decision must be provided to both the contractor together with any party directly engaging the contractor (typically an agent). Until this is provided the end-client will remain responsible for collecting income tax and national insurance.
If the contractor does not agree with the IR35 status decision, there is a new client-led disagreement process which requires the end-client to review a decision and provide a reasoned response to all parties within 45 days. If this deadline is not met the end-client will assume the IR35 liability if they don’t have it already.
The responsibility to deduct the payments for tax and NIC are therefore effectively transferred from the feepayer to the end-client if the end-client defaults. This is a crucial aspect; the end-client could quite easily find themselves in a situation where they are technically in breach of the rules through an administrative mistake.
HMRC will be publishing detailed guidance for organisations and both general and targeted education packages, including webinars, workshops and one-to-one sessions with businesses in particular sectors.
Improvements are also expected to HMRC’s Check Employment Status for Tax (CEST) tool which is expected to be available later in 2019.
On a positive note, the Government has confirmed that the reform is not retrospective and that HMRC will not carry out targeted campaigns for earlier years where a PSC falls within the new IR35 rules from April 2020.
Instead, HMRC are indicating that they will be ensuring businesses comply with the reform for new engagements. As such, an organisation’s decisions about whether workers are within the rules should not automatically trigger an inquiry into earlier years.
Next Steps for Businesses
Businesses that are caught by the new rules must act now by carrying out employment status assessments of their contractor workforce and establishing suitable administration systems and protocols.
Whilst these reforms might seem somewhat draconian there is no doubt that businesses will still be able to engage legitimate contractors who will fall outside of the new rules.
We can support a business through the entire process and are specialists in complex IR35 and employment status reviews. If you wish to discuss any of these changes, please do get in touch.
If you require any further information on this, please contact your local Baldswins office, who will liaise with our employment specialists.
Lancaster 01524 541200, Preston 01772 907070, Rossendale 0345 337 9409