From 6 April 2020, a change to off-payroll tax rules (IR35) is due to come into force for the private sector. With just six weeks to go, how can businesses accommodate these new rules?
28 February 2020
What is IR35?
IR35 is a set of rules concerning the tax treatment of ‘intermediaries’ like agency workers and self-employed contractors who set up limited companies (personal service companies or PSCs) to provide their services off-payroll. It is designed to tackle tax avoidance through 'disguised employment' where contractors pay themselves through dividends, which are usually subject to lower rates of income tax. More significantly, National Insurance (NI) payments are avoided. The rules are designed to level the playing field between employees and these workers.
IR35 was first introduced in 1999 by the then Chancellor, Gordon Brown. Then, as part of its November 2016 Autumn Statement, the Government declared that public bodies using contractors would be responsible for IR35 enforcement from 6 April 2017. This put the burden of determining a contractor’s employed or self-employed status onto the public sector body with the effect that, if an individual was wrongly determined to be a contractor and not an employee, that body could be liable for the tax.
The end-client will be responsible for determining whether a contract is inside or outside of IR35 rules
Until this year, in the private sector the responsibility for determining off-payroll eligibility has remained with the individual or that individual’s PSC. So, where there is an employment agency making the payments as an intermediary, it pays the contracted amount to the PSC, which is currently then responsible for deducting tax and NI before passing on payment to its worker only where that worker is deemed to be employed by their PSC. Now the responsibility for determining employment status is due to transfer to ‘medium’ and ‘large’ private sector end-user client companies or organisations who engage contractors, whether or not they are contracting though an employment agency or employment business.
Small business exemption to new IR35 rules
An exemption will remain for end-clients who are ‘small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:
Annual turnover is no more than £10.2 million
Balance sheet total is no more than £5.1 million
No more than 50 employees.
These companies can maintain the current set-up whereby status is determined by the PSCs.
HMRC outlined their recently announced change to the timing of the reforms which will now be effective on a service provided after April 6 2020. Prior to this change, it had been planned to affect all payments made after April 6 2020, which would have meant that services provided in March 2020, or earlier depending on how quickly invoices had been issued and paid, would have been within scope. But the time for compliance will shortly be upon us, and all companies who are caught by the incoming legislation should be reviewing their off-payroll workers and contractors and ensuring that the determination they are making in terms of their IR35 status is fit for purpose.
Those companies who engage workers through a third party intermediary (such as an agency) should also re-examine their contractual relationships with the agency and the workers it supplies. While the end user clients will determine IR35 status, the responsibility for deducting tax and NI from the monies paid in respect of the individual contractors’ service will still lie with the employment agency. But should the agency for whatever reason be unable to pay those dues to HMRC, liability flows back to the end user. This could leave such businesses exposed to significant future financial risk.
To assist clients 3HR can help with the IR35 transition in the following ways:
Conduct an audit of your current workforce, including those who are engaged through agencies and other intermediaries
Determine whether IR35 will apply to contracts that extend beyond March 2020.
Manage a dialogue with your contractors to ascertain their views on whether the off-payroll rules will apply to their contract
Put processes and checks in place to determine if the off-payroll rules will apply to future engagements
Assist with the completion of ‘Status Determination Statement’ (SDS). The SDS must be provided in writing to the PSC worker and, if an agency is involved in the labour supply chain, a copy must be provided to the agency responsible for paying the PSC. Each contract must be considered separately.
Establish arrangements to consider any disputes from PSCs about the SDS and manage that process in line with the legislation.
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