The off-payroll working rules, commonly referred to as IR35, were first introduced in 1999. The introduction of this legislation was designed to ensure contractors who are working in a similar way as an employee would pay the same Income Tax and National Insurance contributions as employees typically would.
During the 2018 Budget, it was announced that the off-payroll working rules in the public sector would be extended to the private sector. The off-payroll reforms in the private sector are largely as expected and broadly mirror the reforms in the public sector.
As anticipated, the reforms will apply from 6 April 2020*. HMRC have confirmed that they are not seeking to apply this retrospectively and will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time.
The small companies exemption
As expected, the reforms will only apply to medium and large companies. The current rules will continue to apply to contracts with small companies, as defined in the Companies Act 2006. This is HMRC’s attempt to minimise the administrative burden for small companies.
The 5% allowance
The current rules within the private sector allow a deduction of 5% prior to calculating your PAYE Tax and NI liability. This allowance is intended to compensate the PSC for the costs of administering the IR35 legislation. From April 2020* the PSC will no longer bear the responsibility for the determination of the IR35 status of the contract or making the payroll submissions to HMRC. As this will no longer be the responsibility of the PSC the 5% allowance will be removed for contracts with medium and large organisations. This allowance has not been available in the public sector since April 2017. This means that 100% of the contract income will be subject to PAYE tax and NI deductions.
Where the responsibility remains with the PSC, as it will for engagements with small companies, the 5% allowance will remain.
PAYE tax and NI deductions will be made at source by the ‘fee payer’
If the client determines the engagement as inside IR35, the amounts paid to the workers intermediary for the workers services is to be treated as employment income. As with the public sector rules the fee payer will be responsible for deducting PAYE tax and NI and paying this to HMRC.
Introduction of a Status Determination Statement (SDS)
The legislation introduces a Status Determination Statement (SDS), this must be provided to the worker and the fee payer and include the status of the engagement and the reason for that decision. The client must have taken reasonable care to arrive at the decision in order for the SDS to be valid.
The client will have ‘fee payer responsibilities’ until they pass the SDS to the worker and the party they contract with i.e. they will be responsible for any tax liability. The last party in the supply chain to receive the determination is classified as the fee payer and will take fee payer responsibilities.
Introduction of a statutory client-led disagreement process
The legislation outlines a client-led status disagreement process, this will also apply to public sector engagements from April 2020*. If the worker or the fee payer disagrees with the Status Determination Statement (SDS) they can challenge this. The client must respond in 45 days to inform the worker or feepayer that either the decision stands and give the reasons why it has reached that decision or give the worker and the deemed employer a revised SDS.
Debt transfer provisions
The draft legislation introduces a new power for HMRC to collect unpaid PAYE from other parties in the supply chain. This will apply to all contracts in the public sector and engagements with medium and large companies in the private sector from April 2020*.
The regulations make provision authorising the recovery from a ‘relevant person’ of any amount that an officer of HMRC considers another person should have paid under PAYE regulations in respect of a deemed direct payment.
This means that if the fee payer fails to make deductions and pay the PAYE tax and NI liability, HMRC can recover the unpaid liability from other organisations in the supply chain.
Improvements to the Check Employment Status for Tax (CEST) tool
In the key information document, HMRC advises that they are making improvements to CEST and the improved tool will be available for use later in 2019.
Mark Beal-Preston, Chief Commercial Officer of the Optionis Group which includes Nixon Williams, said:
“Across the industry, there is still a distinct lack of understanding about the new rules – from contractors to recruitment agencies and end clients. There are still question marks hanging over the reliability of government’s CEST tool and if it can really make the necessary changes to needed provide accurate assessments in line with case law, as well as delivering planned education on how to prepare businesses in time.”
Need more advice?
IR35 legislation can get confusing rather quickly and it can take time to get your head around it. We’ve had a wealth of experience in dealing with the finances of contractors, so we’re able to answer any questions you may have regarding the off-payroll rules. We’ve also put together a collection of helpful guides. If you would like to speak to us about IR35, please get in touch with our team on 01253 362062.
* Update: at the time this article was written, the off-payroll (IR35) reforms were due to be implemented on the 6th April 2020. On the 17th March 2020, the UK government announced that it would be deferring the reforms to the 6th April 2021 to help businesses and individuals during the COVID-19 crisis.