From April 2020, the IR35 ‘off-payroll’ rules will be extended to the private sector, having a huge impact on both employers and contractors alike. What exactly does this mean, and what should you do to prepare in advance?
IR35 refers to the UK’s anti-avoidance tax legislation which was initially designed as a method to stop people (disguised employees) from having unfair tax advantages. HMRC believed workers were paying less tax and national insurance by supplying their services to clients via an intermediary, such as a limited company, where they would otherwise be an employee if the intermediary was not used.
The responsibility fell to the worker to assess their own status, rather than the organisation paying them.
The new ‘off-payroll’ rules were implemented in April 2017 for contractors working for public sector organisations, meaning the responsibility then lay with the employer (the client) to determine the IR35 status of individuals, and if they were deemed an employee then PAYE and NIC would be deducted at source.
From April 2020, most private sector companies will be also responsible for determining the IR35 status of people who work for them, but who do not have employment status. Only ‘small businesses’ will be excluded.
During a 12-month period, a business is deemed to be a ‘small’ company if it meets two or more of the following criteria:
- Turnover – not more than £10.2 million
- Balance sheet total – not more than 5.1 million
- Number of employees – no more than 50
Any contractors engaged by small companies will continue to operate the IR35 rules as they do currently (i.e. the responsibility for determining their employment status will remain with the contractor and not pass to their clients).
HMRC has created a new employment status test to assist with identifying which workers would be caught under IR35: https://www.gov.uk/guidance/check-employment-status-for-tax
By completing this test, a company can prove they have taken reasonable care to make sure they are complying with legislation. Failure to comply could lead to a PAYE enquiry and costly penalties.
It is still to be decided exactly how the changes to IR35 will be implemented in the private sector, however, whatever the outcome, the end result will require private sector companies to bear responsibility for determining whether IR35 applies to their relationships with the consultants they engage and take on the financial liability if they get this assessment wrong. Contractors (particularly those who work for large companies) should start to look at their options and clients should start to make arrangements right away to ensure they are ready to take on their new responsibilities in April 2020.
If you are concerned about any of the forthcoming changes, please give us a call on 0141 345 2335.