As of April 2020, ‘off-payroll’ rules are due to be extended to the private sector. This will affect a large number of contractors who are currently working through recruitment agencies or a Personal Service Company (PSC). These changes will also have a number of impacts on recruiters and end-clients.
What is IR35
IR35 legislation aims to codify the relationship between employer and employee and is designed to stop workers liable for PAYE claiming that they’re contractors. The new rule changes are aimed at clarifying who makes the decisions as to whether a contractor is self-employed or operating as an employee. It also extends these tax reforms to the private sector.
What are the changes to IR35?
Draft legislation was published in July 2019 and the changes due to be implemented in 2020 will impact on:
- Contractors working through limited companies
- End clients
The new private-sector rules are consistent with those in place in the public sector since 2017 and medium to large scale businesses can learn from their impact. The end-client has sole responsibility for establishing whether a contract lies inside or outside IR35 rules.
- Small businesses are exempt
- End-clients who meet two or more of the following criteria will be exempt from the new rules:
- Annual turnover below £10.2 million
- Balance sheet total below £5.1 million
- 50 employees or fewer
Status Determination Statement (SDS)
End-clients must confirm the IR35 status of a contract by completing and submitting an SDS. This must include:
- The worker’s employment status following a complete IR35 assessment
- The reasons for making the employment status decision
Until the SDS is provided to all parties including any agents, the end-client assumes the responsibility for collecting income tax and NICs.
Dispute resolution is led by the end-client
If there are any disputes from the contractor’s PSC concerning the SDS, the end-client will have 45 days to respond to the PSC with details as to when and how a review will take place. If the original SDS is not upheld, a new one must be provided according to the IR35 rules. If the end-client fails to do so then they assume IR35 responsibility.
Employment tax liabilities are transferred to another relevant person
A relevant person is anyone involved in the employment supply chain and can refer to an agency if one is used. HMRC can claim tax liabilities from the highest party in that supply chain who is non-compliant with the new IR35 rules.
HMRC has provided an online Check of Employment Status Tool (CEST) which is designed to determine employment status for tax purposes. HMRC applies three main tests to determine whether a contract worker should be regarded as an employee or self-employed:
- Can they hire someone else to finish the assignment?
- Do they work on assignments with a start and end date?
- Do they own their own tools and equipment?
- Do they provide their own insurance and cover their own financial risk?
- Do they benefit from the same rights as other employees?
- Are they paid on a one-off basis?
- What is the intention of both parties when the work is contracted?
- Do they operate as part and parcel of the organisation?
- Do they trade as their own business?
- Do they decide what, when and how to complete the assignment?
Mutuality of obligation
- Is the work time limited?
- Do they have the right to terminate a contract?
What should contractors do?
It’s likely that the proposed IR35 changes will have a profound impact on private-sector contractors. However, until April 2020, the PSC retains responsibility for determining the IR35 status of any assignments. However, PSCs should take the following steps to ensure that the transition to the new arrangements is as seamless as possible:
- Ensure that all work carried out before April 5, 2020 is paid for
- Check potential clients for small business status
- Establish the SDS and Status Disagreement processes of any potential client
- Account for and pay any tax liabilities to HMRC
What should end-clients do?
There are a number of practical steps that end-clients can take to mitigate the impact of the IR35 rule changes:
- Conduct an in-depth independent IR35 contract review rather than relying on the CEST
- Get input from contractors into IR35 decisions
- Take the new IR35 responsibilities seriously and allocate adequate resources
End-clients and contractors who wish to navigate the changes as smoothly as possible should to be ready to implement the IR35 changes as quickly as possible. By taking the appropriate steps now, making IR35 decisions need not leave either party liable under the new legislation.