Background
As previously reported in Muras Matters last year the rules for off payroll working, commonly referred to as ‘IR35’, are due to be extended by HM Revenue & Customs (HMRC) to the private sector for all except small businesses from 6 April 2020.
Most readers will be aware that the rules refer to the legislation which prevents individuals from providing their services via an ‘intermediary’, such as a personal service company, and consequently paying less tax and NI than if they were employed directly.
Detail
Under the new rules, hiring organisations and end clients will have to determine whether IR35 should apply to their engagements with service providers. Where IR35 is deemed to apply, individuals operating through a personal service company will have tax and national insurance (NI) deducted at source from payments made to them. The responsibility for deducting the tax and NI falls upon the fee payer, which might be the client or might be an agency in the supply chain.
If the end user is a small business however then they are not affected by the rules and the responsibility for IR35 remains with the personal service company. A small business is classified as one which satisfies two out of the following criteria:
- Turnover of £10.2 million or less
- Balance sheet total of £5.1 million or less
- Less than 50 employees.
As has been seen in the public sector since the rules were introduced in April 2017, the changes will impact both the individuals providing the service as well as the business contracting with them. Therefore, it is important that all parties consider the likely impact such arrangements may have on their own business.
Determining IR35 status is not a straightforward process, and broadly requires the end user to assess whether the contract they have with an individual via an intermediary is more akin to an employment or a self-employment relationship. This will require clients to understand whether the contractor or worker is in business on their own account, which may involve knowing about the contractor’s other engagements, details which they may not be willing to share.
Contracts between clients and their workers should be carefully reviewed in preparation for the changes so that all parties are aware of their status and obligations prior to April 2020. It is possible, as was seen when the rules were introduced in the public sector, that some large businesses may cease to use a personal service company altogether or instead blanket treat all such engagements as falling under the IR35 rules.
The application of IR35 remains a complex area and if you would like more information on how the legislation applies, or how the new rules may affect you, please contact our Tax Director, Jenny Marks.
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