The government introduced reforms in relation to IR35 to the public sector in April 2017, known as the ‘off-payroll rules’. The government now believes that the time is right to extend these rules to private sector businesses (with some exceptions).
The new rules will apply from 6th April 2020 and you need to know what to expect.
Here is what you need to know:
If you are currently a contractor working through your own personal services company (PSC), you should already be applying the IR35 rules, making an assessment on each of your assignments to deem them either inside or outside of IR35. If, but for the existence of the PSC, you look like an employee of the client for tax purposes then the assignment is deemed to be inside IR35 and pay should be subject to PAYE tax and national insurance. Employer’s national insurance will also be payable.
From April 2020, the client will need to know how a contractor is engaged, e.g. whether PAYE is applied by an agency or other party such as an umbrella company.
The client will be responsible for assessing the contractor’s status for tax purposes.
Making the tax status decision:
HMRC have said that they will stand by CEST outcomes provided that the information inputted is accurate. The CEST tool is not mandatory and clients may use any assessment method they wish, however, clients must take reasonable care in making their tax status assessment or risk being liable for unpaid tax and NI. Clients should not make blanket decisions such as “all contractors are inside IR35” or “all contractors are outside IR35”.
Having made the tax status decision, the client will have to pass that decision to the party they contract with (usually the recruitment business).
Where the assignment is assessed as being inside IR35, the fee payer (the party next to the intermediary in the supply chain) will have to deduct tax and national insurance before paying the intermediary.
Final legislation is expected by the end of 2019/early 2020, however, clients and agencies must start to prepare for what is a fundamental change in tax rules.
To assess who may be affected, agencies and clients will have to ask questions about ownership and management of an intermediary. They will ask for UTR and VAT numbers and may enquire how many other clients you have and what insurances you hold. They must comply with tax law and so will not be in breach of data protection law by asking for this information, provided they process it correctly.
Where a client decides that an assignment is inside IR35 they will issue a Status Determination Statement to the contractor and other concerned parties in the supply chain, I.e. the agency
The fee payer will have to deduct tax and national insurance before they pay the intermediary (previously they would have paid gross). They will also have to pay employers’ national insurance. They will report on this through real time information (RTI).
If a role is ‘outside IR35’ the intermediary remains responsible for its own tax affairs.
As some agencies do not run their own payrolls, they may pay contractors through umbrella companies. We have a list of approved umbrella companies for contractors to choose from.
Beware, DO NOT engage with umbrella companies or other organisations that attempt to simply ignore the client’s status decision. Be wary of any organisation that says they can pay you 80 or 90% of pay “tax free” or who offer payment “solutions” such as loans or offshore arrangements. HMRC is very alert to disguised remuneration. Also, be wary of contract reviewers who say they can get you outside of IR35 simply by, for example, adding a substitution clause to your contract. In the event of an investigation, Courts will look at more than just the contractual documentation.