What’s happening and when?
The IR35 rules in the private sector are changing. The IR35 rules apply where an individual works through an intermediary, such as a personal services company (Limited Co), and provides their services to an end user client. If that intermediary did not exist, but the individual looked like an employee of the client for tax purposes, then that assignment is deemed to be ‘inside IR35’ and the individual’s pay should be subject to PAYE tax and national insurance. Employer’s national insurance will also be due.
Due to non-compliance, the Government changed the application of the IR35 rules in the public sector in April 2017 – these are known as ‘off-payroll rules’. The off-payroll rules will apply in the private sector from 6 April 2020. This means responsibility for applying the rules will fall on the end user client not the intermediary.
The off-payroll rules from April 2020?
The off-payroll rules which currently apply in the public sector will also apply in the private sector, albeit with some changes.
Small companies exemption.
The off-payroll rules will not apply where the end user client is a small company, as defined in the Companies Act 2006. Where organisations are exempt, the existing IR35 rules (where the intermediary is responsible for applying the rules) will continue to apply.
Passing status decisions through the supply chain
End user clients will have to assess the IR35 status of each assignment where the services are provided by an individual working through an intermediary. Under the reforms, they will have to pass that decision and their reasons for coming to that decision, to the off-payroll worker as well as the party they contract with (usually the recruitment business).
Check employment status for tax tool (CEST)
The end user client will have to understand the IR35 rules and use an appropriate assessment tool to reach an accurate status decision. In 2017 the Government introduced CEST which is an online tool. https://www.gov.uk/guidance/check-employment-status-for-tax
Resolving disagreements over status
Off-payroll workers will have a right to receive the status decision, and the reasons behind it, directly from the end user client. In addition, the consultation proposes a client-led status disagreement process to help resolve disagreements about the status decision reached. It is proposed that a minimum set of requirements will be set out in the legislation.
There are a couple of different points to consider. Firstly, where the fee-payer is off-shore, the fee-payer’s responsibilities move up the supply chain to the next UK based entity. Secondly, the Government proposes that the liability should initially rest with the party that has failed to fulfil its obligations until such time as it does meet its obligations at which point liability moves down the chain. However if HMRC are unable to collect the outstanding tax liability from a party, the liability should transfer back to the first party or agency in the chain, and if that fails, then HMRC will pursue the client.
Clients should start to assess whether they will be affected or exempt from the off-payroll rules, because they are a small company. Those who will be affected should start to assess who amongst their contractor population might be affected by this change. They must also identify who within their organisation should make the status decisions and ensure that those individuals understand how to asses status.
Source: Recruitment & Employment Confederation