IR35 and Off Payroll Working is undergoing some big changes
IR35 has been with us since the year 2000 but it has not been a difficult issue for most private sector businesses engaging contractors. That is about to change dramatically with effect from 6 April 2020 – the IR35 rules which have applied in the public sector since 6 April 2017 are being extended to the private sector. All businesses in the private sector need to consider their tax exposures in this revised IR35 regime now to make sure they are not caught out come April.
What is IR35?
IR35 refers to the tax legislation under which contractors working through an intermediary are taxed. Historically the end user of the contractor services has not been concerned about IR35 because it has been the responsibility of the intermediary to determine the tax position.
The consequence of finding that IR35 applies is that the intermediary has to pay employer NIC (13.8%) and deduct tax (up to 45%) and employee NIC (12%/2%) – referred to as the Employment Taxes – on the amount paid by the end user client less a 5% allowance for expenses.
Whilst HMRC have tried to counter the perceived abuse of the tax law in this area, they have struggled to land any meaningful blows and have lost more cases than they have won in the Tax Tribunals and Courts. It has proved to be a very expensive tax to collect for HMRC because every HMRC challenge or tax assessment will involve only one individual.
How is IR35 changing on 6 April 2020?
End users to carry out tax status assessments
Responsibility for carrying out the assessment passes to the client end user to determine whether, but for the intermediary, the contractor would have been an employee. The end user is required to carry out this Status Determination with “reasonable care.”
HMRC have provided on online tool – CEST – to help with this but it needs to be used carefully.
The end user is obliged to carry out the Status Determination and provide a copy of it to the “fee payer” with which it has contracted and also to the contractor. That assessment must be carried out before the contractor undertakes any work. If it is not, or the end user does not provide a copy of the assessment to the fee payer and the contractor, the end user will be responsible for paying the Employment Taxes until the Status Determination is completed and a copy provided to the fee payer and contractor. OUCH!!!!
If the contractor disagrees with the determination, a review can be requested. The end user must consider the reasons given; decide what to do; and keep a record of the decision. The response must be given within 45 days of any request otherwise liability to pay the Employment Taxes passes to the end user. OUCH!!!
Transfer of liability
A further consequence of the change is that end users are exposed if there is non-compliance further down the supply chain. If there is a default in paying the Employment Taxes, HMRC can work back up the supply chain and the client end user may be asked to cough up the taxes due. OUCH!!! This leaves end users in a vulnerable position.
The New IR35 Rules
1. End User plc needs to make an assessment by April 2020.
2. End User plc needs to advise Recruiter Limited and Joe Bloggs by April 2020.
3. If End User plc decides that new rules apply, Recruiter Ltd must make tax withholdings and pay over to HMRC (just like monthly payroll) then pay net amount to Bloggs Ltd.
4. Recruiter Ltd should update their standard contracts to cover this new position.
What should businesses do now?
The only good news in all of this is that end user small businesses (by the Companies Act definition) are exempt from these new rules. So the first step is to see if you can “escape” using this exemption.
In short, if you fail any two of these 3, you are caught:
More than £10.2m per annum turnover;
More than £5.1m of Balance Sheet Assets;
More than 50 employees.
The next step is to identify if there are any contractors in the supply chain. Having done that, the end user needs to carry out its Status Determination with “reasonable care”. Once it has done that, it will be able to identify where there may be issues and how it intends to deal with those issues.
Our comprehensive and competitively priced solutions can help take this headache away. Our service includes:
- Analysis of your supply chain to identify possible IR35 cases and tax exposures.
- Discuss with you and advise on the most appropriate solutions to implement.
- Prepare the Status Determination statements.
- Deal with any review requests from contractors.
- Provide training to your managers to ensure ongoing compliance.
To find out more about the new IR35 rules and how they will impact your business call Alan Ross on 01628 770 770 or email [email protected]
Getting ready for IR35 Webinar – In our video Wilson Partners Accountants and Herrington Carmichael Solicitors address the IR35 changes.