What is happening?
The government is extending the IR35 legislation off-payroll rules, which have been in place in the public sector since April 2017, into the private sector. This means contractors working through intermediaries such as personal services companies will have new rules to abide by.
When will this take place?
The new rules apply to all payments made to private sector companies on or after the 6th April 2020.
What does this mean?
The client, not the contractor will now be responsible for assessing IR35 status. This means the client or the fee payer (if an intermediary/agency is involved), will be responsible for taking the tax and national insurance before paying the personal services company should they be inside IR35 assignments.
What is IR35?
‘IR35 is a piece of legislation that allows HMRC to collect additional payment where a contractor is an employee in all but name. If a contractor is operating through an intermediary, such as a limited company, and but for that intermediary, they would be an employee of their client, IR35 kicks in.’
Contractors who work through intermediaries should already be applying the IR35 rules. The intermediary should make an assessment on each assignment: if that intermediary did not exist, but you act more or less like an employee of the client, then for tax purposes you are deemed to be ‘inside IR35’ and your pay is subject to PAYE tax and national insurance.
This has been in place in the public sector since April 2017 and will now make its way into the private sector with some slight changes. The client will be responsible for establishing how the contractor is engaged and how they pay their PAYE even if they approach the contractor directly and not through an agency.
Most important to understand is that it is the client, and not the contractor or the intermediary who will be responsible for assessing the contractor’s status for tax purposes.
Small companies exemption – Small companies will be exempt from the changes. A small company can be defined as such if it has:
- An Annual turnover no more than £10.2 million
- Balance sheet no more than £5.1 million
- No more than 50 employees
Companies in groups or joint ventures can be exempt as long as the companies are small.
Making the tax status decision – The client will have to understand the IR35 rules and use an appropriate assessment tool to determine if they apply.
Currently, HMRC provide the check employment status for tax tool on their website: https://www.gov.uk/guidance/check-employment-status-for-tax
Passing status decisions through the supply chain – Having made the tax status decision the client will have to pass that decision down the line and through any relevant agencies together with their reasoning so the fee-payer and everyone in the line are aware of the situation.
Resolving disagreements over status – The end user client must set up a client-led status disagreement process to resolve the situation. It must:
- Confirm that is has considered the representations made and that SDS is correct, providing adequate reasoning.
- Give a new SDS confirming a different conclusion and state that the previous SDS is withdrawn.
If the client does not respond within 45 days they will become the fee payer.
What does this mean for contractors?
- When a client decides that an assignment is inside IR35, the fee payer will deduct the tax and national insurance before they pay the personal services company and will also pay employers' national insurance. Contractors could also join a company as a PAYE temporary worker, or join an umbrella company that would pay you as a PAYE temporary worker.
- If a client determines that a role is outside of IR35 then the personal services company remains responsible for its own tax affairs.
- Be wary of any organization that suggests they offer payment solutions or any “Tax Free” payments. HMRC is very alert to these disguised methods and offenders will be penalised.
- If using an umbrella company, you should only use a company that is fully compliant with HMRC. At The Oyster Partnership, we only use FCSA accredited members which you can check here FCSA.org.uk.
If you are struggling to understand the new changes to the IR35, you are welcome to reach out to us, we will be happy to guide you through them. You can contact our accounts via email: firstname.lastname@example.org, or by phone: 020 7766 9000