According to a survey carried out by recruitment business, Harvey Nash, 20% of businesses will no longer engage contractors when the IR35 rules change in April 2020.  It has been widely reported that RBS, Barclays and GlaxoSmithKline are amongst businesses taking this route, given the proposed changes.

This is a simple guide to IR35 and what the April 2020 changes actually mean.

What is IR35?

IR35 is the name of the Inland Revenue press release in 2000 which explained legislation being introduced to tackle a perceived area of tax avoidance - when individuals supply their services through their own limited company (such as a personal service company "PSC"), paying themselves in dividends rather than paying PAYE income tax and national insurance contributions (NICs) on income from their services.

Broadly, the legislation provides that if an individual personally performs services for a client through an intermediary (a company, partnership or LLP in which it has a material interest) but the individual would have been regarded as employed by the client if the arrangements had been made directly with the client, then the individual should be treated as an “employed earner” for NICs and employed for income tax purposes.  

What do “inside IR35” and “outside IR35” mean?

An individual is often described as working "inside" IR35 if they would effectively be an employee of the end-user client, but for the services being provided through their intermediary.  An individual works “outside IR35” if they would not be considered an employee, even if they provided services directly to the end-user. 

What does “off-payroll” working mean?

Off-payroll working generally refers to any consultant, contractor or worker who is not paid on a PAYE basis through the payroll.  Those who are self-employed or provide services through PSCs will invoice for their services and therefore be “off payroll”.

How are the rules changing in April 2020?

Currently, where the end-user is in the private sector, the PSC is responsible for determining whether the individual they provide to carry out services is working “inside” or “outside” IR35.  The PSC then makes the necessary PAYE tax and NICs payments. From 6 April 2020, the end-user client of the services  (unless they fall in the definition of a small business) 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 whom they contract, as well as to the individual and the PSC.

What is a “status determination”?

This is a determination as to the individual’s employment status for tax and requires the end-user to consider what the employment status would be if the individual provided services directly to the end-user client, rather than through their PSC (or other intermediary).  HMRC has an on-line tool Check Employment Status for Tax (CEST) which is a good starting point but organisations may want to assess the position more fully and on an individual basis, given the development of case law on employment status.  The end-user must take “reasonable care” in carrying out status determinations and this should not be done on a blanket or job basis.  It is understood that HMRC is updating the CEST tool.

Who is the “Fee Payer”?

In broad terms, the Fee Payer is usually the lowest in the supply chain before the individual’s PSC.  It is the organisation who pays the individual’s PSC or intermediary. Note that there may be other "employment intermediaries" in the supply chain in between the end-user and the individual’s PSC – such as a recruitment business.  These should not be confused with the individual’s intermediary but they also have responsibilities under the new rules and may be the Fee-Payer if they pay the individual’s PSC or intermediary. 

The Fee Payer must receive the status determination down the chain from the end-user client.  If the rules apply, the Fee Payer is responsible for deducting the tax and NICs and paying these to HMRC.

When do the new rules apply to payments?

The rules apply to payments made to the individual’s intermediary/PSC on or after 6 April 2020 even if the work was carried out before that date.