What are the changes in April 2020?
The IR35 tax rules are changing in respect of individuals who provide their services to medium and large private sector businesses through their own personal service company (PSC), often described as "off payroll" working. Similar rules are already in place in the public sector.
Currently, the PSC is responsible for determining whether the individual they provide to carry out services is working “inside” or “outside” IR35 by assessing the working relationship in practice, and making the necessary PAYE tax and NICs payments. An individual works "inside" IR35 if they would effectively be an employee of the end-user, but for the services being provided through their PSC.
From 6 April 2020, the end-user client of the services will become responsible for making a status determination (i.e. a determination as to whether the individual is employed for tax purposes or self employed). They will be responsible for passing that determination and the reasons for it down the supply chain to the entity with which they contract, as well as the worker and the PSC . The supply chain may be quite complicated if there is an employment business involved too.
The “Fee Payer” in the chain, i.e. the organisation that pays the PSC for the individual’s services, will be responsible for paying PAYE tax and NICS if the status determination is that the individual is, in fact, employed for tax. The Fee-Payer may be the end-user client or it may be another employment intermediary such as a recruitment business, depending upon the supply chain.
End-user clients must take “reasonable care” when making a determination about the employment status (for tax) of a worker as failure to do so will mean that they will be liable for the worker’s tax and NICs. Blanket determinations are not permitted.
There are implications for those in the chain, end-user clients and employment intermediaries such as recruitment businesses, if they fail to comply with their obligations, including being deemed to be the "Fee Payer" and having the liability for the deduction and payment of tax and NICs in relation to the services provided by the individual.
Why act now?
Thought will need to be given to this issue in good time prior to the implementation date of 6 April 2020 to ensure that end-users, workers and intermediaries such as recruitment businesses are ready for this change. The summary above is only a broad outline of the changes. Organisations will need to understand the implications fully and implement new processes when engaging off-payroll workers.
10 things to do now if you are a business engaging off-payroll workers
- Assess whether you are a "small" business (based on Companies Act definitions) and therefore excluded from the new rules
- If so, note when you may become a medium/large business and therefore in scope as you will need to be prepared
- Assess whether you are the end-user client (you may not be the end-user if services are fully outsourced)
- Assess the working relationship and status of all individuals providing services via PSCs or other employment intermediaries
- Ensure that you also assess individuals working through PSCs who are providing services to you through recruitment businesses
- Ensure that you are aware of all entities in the labour supply chain
- Provide a status determination (using "reasonable care") and ensure that this is communicated down the supply chain as required
- Review and update as necessary the contracts by which you engage such workers
- Put a status determination disagreement process in place to address concerns by a worker or their PSC in relation to the determination given, bearing in mind the time-frames in which responses must be provided to any notification of disagreement received
- Put in place arrangements to deduct and pay PAYE tax and NICs if you are the Fee Payer and any individual working off-payroll is deemed to be inside IR35 and therefore employed for tax purposes
Note that the new rules will not affect the individual worker's employment status in terms of employment rights as their PSC will remain responsible for holiday entitlement etc. The rules are also not applicable to those who are self-employed and do not provide services through a PSC.
The reforms are not retrospective so a change in status should not trigger an enquiry into services provided through a PSC in earlier years.
HMRC published draft legislation in July that, from April next year, places the onus on private sector firms to check whether contractors need to pay tax and national insurance contributions, shifting responsibility from the contractor to the employer using their services.