The Government has published the draft legislation aimed at reforming the operation of the off-payroll working tax rules, known as IR35.
Given current political uncertainty, many were gambling on these new rules being kicked into the long grass. However, it’s now clear the new rules will be implemented in April 2020.
All organisations should therefore review the new rules to determine any impact they may face. The time it could take to identify and amend affected contracts, update internal processes and calculate any financial exposure should not be underestimated .
The off-payroll working rules (with us since 2000) seek to ensure contractors who work like employees but supply their services through their own contractor’s intermediary entity, such as a personal service company (PSC) pay broadly the same income tax and National Insurance contributions (NICs) as employees.
In April 2017, new rules were introduced for public sector organisations, shifting responsibility for deciding whether the rules apply from the PSC to the public sector organisation, that is the ‘end-user’ of the contractor’s services.
New legislation will now extend this approach to medium and large end user businesses in the private and third sectors.
Existing IR35 operational rules will continue to apply for small businesses, which are defined based on the Companies Act 2006 definition of ‘small company’.
Who will be affected?
Specifically, the new rules will impact:
- medium and large businesses in the private and third sectors that engage contractors who provide their services through intermediary entities such as PSCs ;
- recruitment agencies and other entities within the labour supply chain that supply staff who work through contractor’s intermediary entities including PSCs;
- contractors who supply their services through entities such as PSCs and who would be classified as employed if engaged directly; and
- public sector organisations, that will also be affected by changes to the rules – eg the new statutory status determination statements and employment status disagreement process.
What needs to be done?
This will vary depending on the nature of the issue and the entity concerned.
- Private and third sector end-users will need to identify any contractors they engage through an intermediary and assess each contract individually.
- The ‘end-user’ must provide the contractor and any third party they contract with, such as a recruitment agency, with a status determination setting out the reasons for their assessment.
- A new disagreement process will allow for a challenge to be made to the status determination.
- Public sector organisations will need to update their processes to meet stricter assessment requirements and right of appeal provisions.
- All parties in the labour supply chain will need to be aware of and pass on the decision made by the end-user.
- Where an employment status determination is made, the party paying the contractor’s intermediary (eg PSC), known as the fee-payer, will need to account for any income tax , employee and employer NICs and apprenticeship levy due through PAYE.
- New transfer of debt provisions could result in a transfer of any tax liability up the labour supply chain, potentially back to the end-user, where the fee-payer fails to comply with their tax withholding obligations.
What is Government doing to help?
- The Check Employment Status for Tax (CEST) tool can be found on HMRC’s website. This can be used to help make the status determination. HMRC has said it will be enhancing CEST and developing new guidance on its use, but we don’t know when this will be available.
- HMRC has published high-level guidance for organisations and has said it will provide further support, including webinars, workshops and one-to-one sessions with businesses in particular sectors, in due course.