Is your business ready for the changing IR35 tax rules?
Background to IR35
Personal Services Companies (PSCs) became increasingly popular in the 1990s and allowed individuals to structure their working affairs in such a way that resulted in individuals paying less tax and national insurance.
In 2000, the Government introduced the IR35 legislation to recover some of these amounts. However, the initial legislation posed difficulties as it placed the burden on the PSC or intermediary to determine whether there was ‘disguised employment’. This created enforcement issues for HMRC, which was required to investigate many small PSCs to check they were compliant, and any additional monetary recovery from individual PSCs was modest.
As such, from April 2017 Public Sector Bodies (PSBs) have been required to determine if IR35 applies to their ‘off-payroll’ workers. This change saw an increase in tax revenue and a decrease in the resources that HMRC was required to utilise to collect revenue.
The new IR35 tax rules coming into force in April 2020
Following this success in the public sector, the Government has now announced that the new IR35 rules will apply within the private sector as well from 6 April 2020.
Medium and large sized private bodies who engage with off-payroll workers through intermediaries or PSCs will be required to determine their status and whether or not tax and national insurance should be paid. It will be the end user client who has responsibility for making this assessment, regardless of how many other bodies are between the worker and the client. If there are agencies in between then they will be advised of the status of the off-payroll worker by their client and will need to make the subsequent administrative adjustments to pay.
How is IR35 assessed?
The new rules are complex but essentially the question a company will need to ask, when using a personal service company to provide services to it, is “whether the person working under that arrangement (i.e. the worker) would be regarded as an employee if the services had been provided under a contract agreed directly between the worker and the company”.
In practice, this is likely to prove a tricky task, particularly with work relationships that have factors which both point to and point away from, IR35.
Who won’t be affected by the changes?
There is some good news for smaller organisations as small companies will not be affected by the changes. A company will be classed as a small company if it meets at least two of the following 3 criteria:
- A turnover of not more than £10.2m
- A balance sheet total of not more than £5.1m
- No more than 50 employees
Agencies and compliant umbrella companies are also unlikely to be affected as they pay workers net of tax and NICs. Those companies will not need to consider whether the PSC’s they use are caught by IR35 or not.
Impact of changes for companies using PSC’s to provide them with services
These changes put the emphasis on the company using the services of the personal service company (i.e. their client) rather than the worker to establish whether IR35 is applicable and whether payments are due.
The Government has introduced a self-check tool to help companies with this assessment. Known as CEST (Check Employment Status for Tax) it can be found online and is free to use. However, this tool has limitations and is currently under review by HMRC. While the CEST tool is a helpful starting point, companies who use PSC’s are at risk of penalties if they do not make assessments properly and should always seek professional advice to protect themselves.
Impact for workers using a PSC to provide their services to clients
Workers and PSC’s should also carry out their own assessment to consider whether they think their work would be caught by IR35 or not. They can use the CEST tool in the same way and we would strongly recommend they seek legal advice.
Additionally, workers using personal service companies to provide their services should be aware that their clients may request information from them in order to determine whether they fall within the scope of IR35. They may find that some of the contracts they are working on come within the scope of IR35 and others may not.
If a worker’s work falls within IR35, they will be deemed to be an employee for tax purposes (although not necessarily for employment law purposes). If this is case, the worker should consider whether they wish to become an employee (which may be suitable in situations where they predominantly work for one client) or whether there is another way that they can demonstrate that they are genuinely self-employed and therefore outside the scope of IR35. If this is the case they may wish to seek professional advice and vary their working practices.
Workers and companies should start preparing now so they are ready for April 2020. The Government is currently undertaking a review of IR35 and how businesses and individuals can make a smooth transition to comply with the new legislation. This is due to conclude at the end of February 2020 and so whilst companies need to start preparing now for the IR35 changes in April, it is possible that further changes may come in prior to the April 2020 deadline. Watch this space for further information.