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. These provide that private sector firms who enter into contracts or make payments to workers engaged through a Personal Service Company (PSC) on or after 6 April 2020 will need to check the individual's 'deemed' employment tax status.
Summary of approach
Reforms in the public sector were introduced in April 2017 with the prospect of this extension into the private sector introduced in the 2018 Budget. The legislation will come into force from 6 April 2020.
Where the individual's role does look akin to an employment type one the engager, 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 responsibility for determining whether the off-payrolling rules apply will move to the organisation receiving the individual's services.
The proposed reforms
A company that qualifies as a small business will not be required to apply the new rules. In these circumstances there is no change and the PSC will assess their own IR35 position, as they are required to currently, and be liable for income tax and NIC deductions, as appropriate.
A company will be regarded as small for this purpose if it has two (or more) of the following:
- Turnover - not exceeding £10.2m.
- £5.1m or less on the balance sheet.
- Number of employees not exceeding 50.
Any business so identified as small using the above guidance will still be required to apply the new rules if it is a subsidiary of a large or medium sized parent.
Further, anti-avoidance provisions are intended to ensure a business will not be able to contrive a situation which artificially creates a small business exemption.
Where an individual works for a medium or large-sized engager outside of the public sector, through their own PSC and falls within these rules:
- The party paying the worker's PSC (the fee-payer) will be treated as an employer for the purposes of income tax and Class 1 NICs.
- The amount paid to the worker's intermediary for the worker's services is deemed to be a payment of employment income.
- The party paying the worker's intermediary (the fee-payer) will be liable for secondary Class 1 NICs and must deduct tax and NICs from the payments they make to the worker's intermediary in respect of the services of the worker.
- The person deemed to be the employer for tax purposes must remit payments to HMRC and to send HMRC information about the payments using real time information (RTI).
Client-led disagreement process
A status determination statement outlining the end-client's IR35 status decision must be provided to both the contractor and any party directly engaging the contractor (typically an agent). Until this is provided the end user 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. This requires the end-client to review a decision and provide a reasoned response within 45 days. If this deadline is not met the end-client will assume the IR35 liability.
The responsibility to deduct the payments for tax and NIC are, therefore, effectively transferred from the fee-payer 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 administration 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 and, following testing by legal and operational experts and stakeholders, are 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 enquiry 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, contact Baldwins on 01536 514871.