On July 2019, the government published the Draft legislation for Finance Bill 2019-20. Among other tax measures, this document introduces important changes to the operation of the off-payroll working rules, also known as IR35.
What is IR35?
IR35 refers to the tax legislation under which contractors working through an intermediary are taxed.
IR35 legislation was introduced to ensure that UK contractors pay the same tax and National Insurance contributions as an equivalent employee would. In other words, to stop the avoidance of tax and National Insurance Contributions (NICs) when a worker provides their services through an intermediary.
Despite various amendments to IR35 over the years, successive Governments have claimed that too many limited company owners are still illegitimately working outside the rules.
Until now, the determination whether a worker has been an employee of the end user has been the responsibility of the intermediary, but this is about to change.
What are the new IR35 changes?
The new IR35 changes come into force on 6th April 2020 and will be extended to the private sector having impacts on end-clients, recruiters, and contractors working through limited companies.
We’ve summarised the main changes and impacts below.
- The end-client is now responsible for determining whether a contract is inside or outside of IR35 rules.
This means that the end-client is now responsible for determining the IR35 status of a contract with a Personal Service Company (PSC) by providing a ‘Status Determination Statement’ (SDS).
The end user is obliged to carry out the Status Determination and pass a copy of it to the agency with which it has contracted and also to the consultant. That assessment must be carried out before the consultant undertakes any work.
If it is not, or the end user does not provide a copy of the assessment to the consultant the end user will be responsible for paying tax and Employer NICs until the Status Determination is completed and a copy provider to the PSC and consultant.
If the Worker and PSC disagree with the determination, It’s the responsibility of the end-client to establish arrangements. The response must be given within 45 days of any appeal otherwise liability to pay tax and employers’ NICs passes to the end user.
- Small business exemption to new IR35 rules.
The legislation applies only to ‘medium or large’ businesses although there’s no small business exemption for public sector organisations.
- Transfer of employment tax liabilities
A further consequence of the change is that end users are exposed if their supply chain contains contractors operating through intermediaries because they will be responsible for conducting the Status Determination; failure to do so will leave them liable to pay tax and Employers’ NICs.
They will also need to ensure that the Status Determination is passed down the supply chain until it reaches the party liable to pay the PSC.
What should businesses do now to prepare for the IR35 changes?
A good starting point is to look at your current workforce to identify those individuals who are supplying their services through personal service companies.
If there are any contractors in the supply chain, talk about their IR35 status. This will give you the opportunity to ascertain any differences in opinion about a contractor’s status at a company level before HMRC involvement.
This can involve looking at the questions asked by HMRC’s CEST tool and using them as a starting point for these discussions.
Awareness of the IR35 changes is key and it should be taken as an opportunity to review that tax status of your workforce and introduce changes for protecting your business from the legal risks associated; such as processes to determine if the off-payroll rules apply to future engagements.
These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.