Extension of off-payroll working rules to the private sector (“IR35”)
Employment status has been a hot topic lately. The Government is now seeking to tighten up the regulations around status and the related taxation implications. Following a consultation in late 2018, the Government has released its Good Work Plan looking to address some of the ‘grey areas’ that exist when looking at employment status.
The proposals call for alignment of the rules from both employment law and tax perspectives, and recognise the need to introduce legislation that improves the clarity of employment status tests.
More immediately, and perhaps of more concern for many businesses are the incoming changes to the IR35 tax rules for the private sector in April 2020. Known as the ‘off-payroll working rules’, these rules were introduced for public sector employers in April 2017 and the same provisions will be extended to some private sector businesses in April next year. They are likely to have a significant impact on how businesses resource contractors.
What does IR35 mean?
The Government implemented IR35 legislation with the aim of preventing a form of perceived tax avoidance. IR35 applies where individuals seek to avoid paying employee income tax and NI (National Insurance Contributions) by supplying their services through their own limited company, a Personal Services Company (“PSC”).
IR35 is therefore quite specific and it only applies where this “intermediary” type of structure occurs. Here’s an example:
- “Mr Smith” sets up a company and works for his company “Mr Smith Limited”.
- Mr Smith Limited enters into a contract with ABC Ltd to provide services under an agreement that Mr Smith will carry out the actual work.
- Realistically there is never any intention for anyone other than Mr Smith to perform the services via Mr Smith Limited and Mr Smith acts, and is treated, in a very similar way to ABC Limited’s employees.
In the Mr Smith example, IR35 may be applied by HMRC if it considers that the sole purpose of Mr Smith’s intermediary company, “Mr Smith Limited”, was to avoid being deemed to be an Employee/Worker of ABC Ltd and avoid payment of employment tax and NI deductions.
HMRC will then assess the factual and practical reality of the relationship between Mr Smith and ABC Ltd (as well as the express contractual arrangement). HMRC will apply a complex test, which they no longer publish, to determine whether the Mr Smith/ABC Ltd relationship is one of a truly self-employed individual or not. If not, then Mr Smith Limited (and possibly Mr Smith) will face the unpaid tax liabilities and potential penalties.
What is changing?
With these new changes coming into effect in April 2020, the responsibility for deciding whether an engagement should fall within the IR35 rules will pass to the organisation. So, if the business decides the engagement is more akin to an employer/employee relationship, then the business will be responsible for paying the relevant employment tax and national insurance to HMRC and will need to deduct these costs from its payments to the PSC (contractor).
Are all businesses affected by the changes?
Following consultation in 2018, the Government is limiting the roll-out of these IR35 provisions to medium and large companies only. The smallest 1.5 million businesses, with fewer than 50 employees, will not be caught by these new provisions.
Medium and large businesses will have until April 2020 to make any necessary adjustments to their contractor engagements.
What about self-employed consultants though?
These new rules will not apply where a self-employed consultant has a direct engagement with a business. For example, if an individual enters into a consultancy agreement directly with an organisation, rather than the intermediary/PSC, the individual will continue to be responsible to HMRC for all tax and NI liabilities.
This is not to say that these arrangements are less risky from an HMRC perspective, as HMRC’s enforcement officers could still investigate the arrangement and form the view that the relationship is in reality an employer/employee relationship and impose the relevant employment tax and NI liabilities, plus any penalties on the employing entity. If you are unsure if your relationship with the self-employed person is truly self-employed then contact us and we can give you our opinion.
What should businesses be doing now to prepare?
From 6 April 2019, the right to receive itemised payslips will extend to all workers, not just employees. Where a member of staff’s pay varies according to time worked, the employer will have to include on the payslip the total hours worked for which the variable pay is received.
This is obviously a huge change for those sectors which commonly use contractors who supply their services via a PSC. Although April 2020 may seem a long way off, companies which are likely to be affected by these changes should be taking steps to introduce the necessary changes. Such steps include:
- Identifying and reviewing your consultant/contractor relationships
- Communicating with all affected workers, and discussing potential options
- Ensuring your terms of engagement with contractors and consultants are clear and accurately reflect their true status
- Consider converting contractors or consultants into salaried employees
This might seem like a challenge, especially if you rely heavily on consultants and contractors, but you don’t need to do it alone. Our expert employment lawyers can conduct an Employment Status Review across all your contracts to identify the relationships at risk of being affected by IR35 or being deemed to be self-employed by HMRC.
If you need advice on the best way to structure your employment or contractor relationships, we can help – we can provide strategic advice and guidance to ensure you have the most effective contractual arrangements to help you achieve your business goals. Get in touch with the team to see how we can help.