Reforms to the tax framework known as IR35 have been lurking in the background since autumn 2018 when the government announced its intention to extend the regime to the private sector.
The new rules covering off-payroll working will apply to workers who supply their services to a client on a self-employed basis via an intermediary (often a limited company known as a personal service company), but who would otherwise be an employee if the intermediary was not used. The new rules will not apply where the intermediary is an umbrella company that employs the individual directly.
From HMRC’s perspective, the purpose of the rules is to make sure that off-payroll workers pay broadly the same tax and national insurance contributions as an employee. For workers caught by IR35, this means a sizeable reduction in net income. For client organisations, the upcoming changes will extend the scope of the framework from the public sector to include private sector organisations unless they qualify as exempt under the small companies regime – as well as shifting the responsibility for checking if the rules apply from contractors to their clients.
With the changes due to take effect from April 2020, it’s an issue that some might be placing on the back burner. However, guidance recently published by HMRC encourages client organisations to start thinking ahead:
- Look at your current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through PSCs.
- Determine if the off-payroll rules apply for any contracts that will extend beyond April 2020. You can use HMRC’s Check Employment Status for Tax service to do this.
- Start talking to your contractors about whether the off-payroll rules apply to their role.
- Put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.
As with all regulatory change, taking basic first steps to understand your exposure is key to saving time and money down the line.
Whether you’re a client organisation or contractor, another good reason to have IR35 on the radar is the chance to have a say in how the rules will operate. HMRC is currently consulting on the changes, with views being sought on several aspects, including the information requirements for different parties, how support from HMRC could be improved, and how disagreements between contractors and client organisations about the status of the contractor should be resolved.
The closing date for responses is 28 May 2019.