The government has published draft legislation which will change the way IR35 works in the private sector from 6th April 2020.
What is IR35?
IR35 is the rule which ensures that individuals engaged via personal service companies (“PSCs”) who work like employees pay the same amount of income tax and National Insurance contributions (“NICs”) as actual employees.
IR35 is an assessment to decide whether but for the PSC, the individual would be deemed an employee of the business which engages the services of the PSC (the “End User”). If they would, the engagement is “inside IR35” and employment taxes and NICs must be paid. If not, the engagement is “outside IR35” and is treated (and taxed) as a genuine business-to-business arrangement.
Until now HMRC has found it difficult to enforce IR35 because the PSC itself makes the IR35 decision and the PSC itself carries the liability for an incorrect decision. Once the decision has been made by the PSC, it is difficult and costly for HMRC to pursue the PSC.
With effect from 6th April 2020, responsibility for making the IR35 decision will move from the PSC to the End User and responsibility for paying the correct tax and NICs will move from the PSC to the business which pays the PSC (which could be either the End User or a recruitment business (referred to as the “Fee Payer” in the draft legislation)).
There are debt transfer provisions so if HMRC fails to recover the tax and NICs from the Fee Payer, HMRC can pursue the End User and others in the supply chain for the unpaid tax and NICs.
The changes will make it much easier for HMRC to enforce IR35. Instead of bringing multiple claims against individual PSCs for small amounts of unpaid tax and NICs, HMRC will be able to bring a single claim against one End User or Fee Payer.
The legislation brings the private sector in line with the public sector (where similar rules were introduced in 2017).
HMRC has developed the Check Employment Status for Tax (“CEST”) Tool to help businesses make their IR35 decisions. The CEST Tool, which was introduced in 2017, has been widely criticised for being too simplistic and for giving incorrect and uncertain IR35 status decisions. HMRC have said they will improve the CEST Tool before 6th April 2020.
Are there any exemptions?
There is an exemption where the End User is a small company (“small companies” are those that meet two or more of the following criteria: (i) annual turnover not exceeding £10.2M; (ii) balance sheet total not exceeding £5.1M; and (iii) not more than 50 employees). There are specific rules for partnerships and other non-corporate bodies and for group structures.
What should be done now?
- All businesses should audit their PSC population to identify which PSCs are likely to be “inside” and “outside” IR35, and which PSCs fall into the middle “grey” area;
- For the PSCs in the grey area, businesses should consider whether alternative models such as umbrella company solutions or consultancy or statement of work models could be used to remove the IR35 risks;
- Start speaking to PSC workers to make sure they are aware of the changes and a plan is in place for implementation;
- Due to the debt transfer provisions, End Users and recruitment businesses must make sure they are only working with compliant and trusted supply chains;
- Contracts with PSCs and with others in the supply chain should be reviewed to make sure they are appropriate for the new rules and give adequate protection;
- End Users should identify which staff will carry out the IR35 tests on the PSC population. Will this be an HR function? Or will it sit with hiring managers? Relevant staff will need to be trained on their new responsibilities (including the CEST Tool) and policies and procedures will need to be implemented; and
- End Users and recruitment businesses should review their payroll software and systems to make sure they are able to apply PAYE to PSC workers where this is required.
There will be a consultation on the draft legislation until 5th September 2019. However, the legislation will come into force on 6th April 2020 – that decision has already been made. The purpose of the consultation is to make sure the legislation works as it is intended.
This article is current as of the date of its publication. The information and any commentary contained in this article is for general information purposes only and does not constitute legal or any other type of professional advice. Marriott Harrison LLP does not accept and, to the extent permitted by law, excludes liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this article.