IR35 was introduced by HMRC in 2000 to crack down tax avoidance whereby individuals would seek to avoid paying employee income tax and national insurance contributions by working through an intermediary, usually a professional services company .
The Government is further tightening the rules and from 6 April 2020 the current rules applicable to the public sector will apply to medium and large-sized companies.
Under the current regime, it is the responsibility of the intermediary to determine whether the rules apply and, if so, to account for income tax and NICs. No obligations are placed on the client as the end-user. The new rules will place the onus on the client engaging the service provider. Companies will, form April 2020, be required to determine the status of the worker and provide a status determination to the intermediary and the worker. The company must give reasons for the determination to the party it contracts with and, on request, to the worker, within 31 days of the determination. All communications must take place at, or before, the first payment under the contract and a system must be created to deal with disagreements by workers.
Given the impact that these reforms will have on medium to large-sized companies in the private sector, it will be important that such organisations take advantage of the time available before April 2020 to prepare.
Organisations which will be affected by the reforms should consider taking the following actions:
- Identify and review their current off-payroll engagements including PSCs and agencies that supply labour to them;
- Review current arrangements for the use of contingent labour;
- Put in place comprehensive processes and policies for ensuring consistent decisions about the employment status of workers engaged by the company and for dealing with any disagreements over status determinations; and
- Review internal systems such as payroll software and on boarding policies to see whether any changes need to be made.
Businesses should conduct an audit of their off-payroll labour force, giving careful thought to what each individual does in practice and what kind of contract they are engaged under. Legal advice should be sought in determining the employment and tax status of workers where it isn’t clear.