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Following consultation, the government announced at Budget 2018 that the reform to the off-payroll working rules (commonly known as “IR35
”), which had been introduced in the public sector in April 2017, will be extended to the private sector from 6 April 2020.
Background – what is IR35?
The IR35 regime was introduced by HMRC to crack down on a form of perceived tax avoidance whereby individuals would seek to avoid paying employee income tax and national insurance contributions (“NICs
”) by working through an intermediary, usually a professional services company (“PSC
The rules therefore apply where an individual (the “worker
”) provides their services through an intermediary to another person or entity (the “client
”) and would be taxed as an employee if they had been hired directly by the client. The intermediary could be a partnership or an unincorporated association, but the most common structure seen is a PSC.
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.
In April 2017, the government addressed apparent non-compliance in the public sector by reforming the existing legislation. As a result, public authorities became responsible for deciding whether the worker would have been regarded for income tax and NICs purposes as an employee, if they were engaged directly. The reforms also made the public authority that pays the worker’s PSC responsible for accounting for and paying income tax and NICs under PAYE to HMRC, on behalf of the worker.Extension of the IR35 regime to large and medium sized businesses in the private sector
HMRC has published a policy paper and consultation document on the extension of the off-payroll working rules to the private sector. The consultation suggests that the rules as applied to the public sector in 2017, will serve as a starting point, but that there will be some additional reform.
The new rules will apply to medium and large-sized private sector clients (as defined in the Companies Act 2006), whilst continuing to apply to the public sector. A small, and therefore exempt, private sector company is one which satisfies two or more of the following conditions:
• Annual turnover of not more than £10.2 million;
• Balance sheet total of not more than £5.1 million;
• Not more than 50 employees.
If the intermediary is an unincorporated business, HMRC’s consultation paper suggests two options: (1) apply the new rules to unincorporated entities with 50 or more employees or turnover exceeding £10.2 million; or (2) apply the new rules to unincorporated entities that have both 50 or more employees and turnover of more than £10.2 million. We await the final decision.
A large or medium sized client that engages individuals who provide their services via a PSC will be required to make a determination of the employment status of those workers. If the client determines that the worker is an employee for tax purposes, then the organisation paying the worker’s PSC (the “fee-payer
”), who may or may not also be the client, will be treated as an employer for income tax and NICs purposes. The fee-payer will therefore be required to include the worker on its pay-roll and will be responsible for operating PAYE on the payments made to the PSC.Requirement to communicate status determination
It is proposed that the client, who is required to determine the status of the worker, should provide the status determination to both the intermediary and directly to the worker. In addition, the client must give reasons for the determination to the party it contracts with and, on request, to the worker within 31 days. All communication must take place at, or before, the first payment under the contract.
HMRC has also acknowledged that a worker may disagree with the client’s determination of their employment status and it is therefore proposed that clients develop and implement a process by which any disagreements which arise can be resolved, such a process being based on requirements set out in legislation. How to prepare ahead of April 2020
Given the impact that these reforms will have on medium to large-sized companies in the private sector which engage individuals through an intermediary, 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 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 this is not clear.
For more information on these changes and how your organisation may be affected please contact: Valerie Lambert on 01223 447427 or click here
to email Valerie.