Expected to be introduced for Private Companies in April 2020.
Off-payroll working rules – or IR35 to you and me – are expected to be introduced for Private Companies in April 2020.
IR35 intends to shift responsibility for determining how a contractor’s fee should be taxed from the contractor and their personal services company (PSC ) to the end-user ( i.e. the client). In the event IR35 applies, the client or, if intermediary agencies are involved, the agency as fee-payer will be responsible for deducting tax and other payments at source.
The reason for the change
The government has long been concerned at the widespread non-compliance with IR35. The intended shift in responsibility from PSC to client is designed to address this by ensuring individuals who provide their services through a PSC, but who otherwise cannot be distinguished from directly engaged employees, would have to pay the income tax and national insurance contributions (NICs) which would have been paid as an employee.
What the change will mean for clients
Under the IR35 rules the client will be obliged to:
- Determine the contractor’s tax status in relation to the engagement;
- Notify the contractor of that status and the reasons for that determination;
- If the client is the fee-payer (as opposed to an agency) deduct income tax and employee NICs from the payment and account for them to HMRC in the event that IR35 applies, and
- Account for employers’ NICs.
What the change will mean for contractors
Given responsibility for determining the tax status of the contractor will now rest with the client, the client (or intermediary agency if applicable) would deduct income tax and employee NICs from the fee payable to the contractor.
Points to note
Where the client is using a third party (I.e. an employment agency) to provide labor, the client must notify the agency of the tax status determination and their reasons. If income tax and NICs are to be deducted, it will usually be the agency or the fee-payer ( in the event that there is more than one agency in the supply chain) which will be liable to make the deductions rather than the client. Despite this, ultimate liability for accounting for tax and NICs on the fee paid will rest with the client e.g. If HMRC cannot recover from the fee-payer or contracting agency.
Preparing for the change
Clients who use the services of self employed contractors should:
- Identify individuals who are engaged via a PSC either directly or via an agency;
- Audit and review any existing contracts in order to identify which arrangements are likely to be caught by IR35 – HMRC have an online tool known as CEST and when a client uses CEST, the HMRC will stand by the outcome provided the answers are in accordance with the guidelines and not contrived to achieve a particular result;
- Using the results of the audit and review, calculate the additional cost of employers’ NICs (and the effect on the Apprenticeship Levy if applicable);
- Amend standard terms used with PSCs;
- Consider outsourcing functions rather than contract for labour supply;
- Establish processes for receiving information and for internal challenge against determinations;
- Maintain strong paper trail of processes followed and decisions made;
- Consider engaging workers directly instead. However, clients must note workers engaged directly would benefit from additional employment benefits including; national minimum wage, paid annual leave and protection from unlawful deductions from wages;
- If the conclusion is likely to be that IR35 does apply to some engagements, consider impact on individuals and how to manage transition;
- If the conclusion is likely to be that IR35 does not apply, gather evidence to support that conclusion.
Advice on the issues raised in this article is available from our Employment team. Please contact Jade Linton for further information on 0121 796 4024 or firstname.lastname@example.org