IR35 changes ahead – are you ready?
IR35 applies to individuals who provide their services to a client through an intermediary (usually their own personal service company or “PSC”) but would be classed as an employee if they contracted directly with the client. The rules are designed to combat tax avoidance by ensuring these individuals (often referred to as off-payroll workers) pay the same tax and National Insurance contributions as employees.
At present, within the private sector, it is for the individuals to determine, via their PSCs, their employment status (for tax purposes) for each contract. From April 2020, in a bid to ensure greater compliance with the IR35 rules, this responsibility will shift to the end client where this is a medium or large organisation i.e. if it meets 2 or more of the following conditions:
- an annual turnover of more than £10.2 million
- a balance sheet total of more than £5.1 million
- more than 50 employees
The existing rules will continue to apply where the end client is a small organisation.
Under the draft legislation, the new rules will operate so that:
- it will be for the client to decide, exercising reasonable care, whether the IR35 rules apply i.e. whether the individual would be an employee if the business contracted directly with him/her;
- the client must inform both the individual and the person or organisation with whom it contracts of its decision and its reasons. Clients are motivated to comply with this aspect in a timely manner; they will be liable for operating PAYE unless and/or until they have provided this information.
- if the individual disagrees with the client’s determination, the client must consider and respond (with reasons) to any objection within 45 days. Failure to respond within this timeframe will also result in the client assuming responsibility for operating PAYE.
- any additional party in the labour supply chain is responsible for passing the relevant information about the status determination down to the next party in the chain.
- the general liability to operate PAYE and pay employers’ NICs will sit with the entity that pays the PSC. This could be the client but in more complex supply chains is likely to be an agency.
HMRC have indicated that they will expect organisations to be ready to fully implement these changes in April 2020. Businesses would therefore be well advised to take HMRC’s advice to take steps now to prepare for the forthcoming changes. A sensible starting point would be:
- conducting an audit to identify and review all existing engagements via an intermediary.
- analysing, as part of any such audit, the extent to which it makes business sense to engage use this type of arrangement – if it doesn’t, businesses should review the termination and notice provisions for existing engagements.
- putting in place comprehensive processes to determine employment status and dealing with disagreements over status in good time.
- collating information to assist with determining employment status in respect of existing engagements. Note that HMRC are in the process of updating their Check Employment Status for Tax tool in preparation for the forthcoming changes.
- reviewing internal functions such as payroll and HR to ensure they able to adequately support the new rules.
FSP is running a free breakfast seminar in Reading on 8 October 2019 (click here to book, password: FSPIR35) and London on 17 October 2019 (click here to book), aimed at preparing organisations for the changes ahead.