Off-payroll working rules are changing in April 2020 in a way that will affect both hirers and contractors. Take a look at our guide to IR35 rules and reforms to make sure that you are prepared for changes.
IR35 is a piece of tax legislation that is applied to ‘off-payroll workers’. It affects those who work for a client via their own intermediary, which in most cases is a Personal Service Company (PSC).
Gov.uk describes the intention of the legislation in the following way:
The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees.
The legislation was put into place to close up a loophole that existed in the tax system before the year 2000. This loophole, named ‘disguised employment’, allowed any employee to set themselves up as a limited company and be subject to less tax while still enjoying the same employee benefits that they had before.
If you are penalised by IR35 you may find yourself paying 25% more in tax annually, so it’s wise to stay abreast of the changes in the law and ensure that you are compliant.
The rules are applied on an assignment by assignment basis. The current set up, which will be in force until 6 April 2020, differs depending on whether you are working in the public sector or the private sector.
However, reforms to the legislation that come into practice on 6 April 2020 mean that both public sector businesses and medium- and large-sized private sector businesses will be responsible for determining the employment status of their workers. The same rules as before will apply to small-sized private sector businesses.
If you are not sure whether IR35 applies to you or your contractors, take the free assessment on Contractor Calculator.
There are four key areas that HRMC uses to determine whether a worker should have IR35 status.
Evidence in support of these factors will be scrutinised both in contractual agreements between the contractor’s PSC and the agency and/or client, and by assessing actual working practices on site during the assignment.
One of the key markers of self-employment is the right of substitution. A contractor is employed to provide a service, so if they can’t fulfil that requirement they are responsible for delegating their work to a suitably qualified substitute or helping the employer find someone else. An employee, on the other hand, is required to provide their services personally.
Here are a few of the questions that HMRC would ask on the topic:
Is the contractor obligated to provide their services personally?
Does the contractor have an unrestricted right to send a substitute (subject to necessary qualifications and experience to properly carry out the work)?
Is the contractor responsible for sourcing and paying the substitute, and has this responsibility been exercised?
Does the client have the right to refuse a substitute?
Is the right to substitute legitimate?
A self-employed contractor has no obligation to accept work, and a client has no obligation to offer work once the contracted period is over. This is not the case in full-time employment: the client is obliged to keep offering work and the contractor is obliged to accept.
Questions related to this are as follows:
Is the client obligated to provide work?
Is the contractor obligated to accept work?
Is there an obligation to work out termination periods?
Can the contractor finish up once the work is completed?
Is the payment based on time or amount of work?
‘Control’ in this instance means that a self-employed contractor should be free to decide how, what, when and where they complete the work they are given. If they are told by their employer how, what, when and where to do the work, the employer’s IR35 status will be called in question.
Does the contractor have control over the manner in which the work is completed?
Is the contractor working on a project or are they fulfilling a role?
Can the client move the work to someone else?
Does the contractor have a choice about their hours?
Do they need consent for time off?
Are they subject to any other time-related restrictions?
Does the contractor have a choice over where work is carried out?
There are numerous other factors that may suggest that a contractor is an employee rather than a self-employed worker. Giveaways include having a rolling contract and appraisals, being eligible for bonuses, having access to employee facilities or functions, having branded business cards and more. In contrast, self-employed workers are likely to work on finite projects with an end date, use their own equipment and be treated like an independent contractor.
Things to consider are:
Is the contractor treated as or do they act like an employee?
Do they carry their own financial risk?
Do they use their own equipment?
Currently in the private sector it is the contractor’s responsibility to determine the IR35 status of each assignment. Many contractors operating through a PSC seek the advice of their accountant to help them determine their status.
If the contract is found to be inside IR35, it is the responsibility of the contractor to complete the deemed salary calculation, make the RTI submissions to HRMC and pay the correct levels of tax. As the contractor bears the responsibility and the cost of applying the IR35 legislation, HMRC guidelines allow a deduction of 5% or the relevant income prior to the deemed salary calculation.
In the event of an investigation, if HMRC disagree that the contract was outside of IR35, they will issue determinations for unpaid PAYE and NIC’s, and possibly penalties. This will be the contractor’s liability.
In April 2017 the off-payroll reforms in the public sector instigated changes to how the IR35 legislation was to be applied. The responsibility for determining the contractor’s IR35 status transferred from the contractor to the public sector organisation. If there is another party in the supply chain who pays the PSC, such as an agency, the client or end hirer advises them of their decision before the contract or work starts.
If the public sector organisation determines the contract to be inside IR35:
The party who pays the PSC – known as the fee payer and often an agency – is treated as the employer for tax purposes. Before making the net payment to the PSC, the fee payer is responsible for accounting for and paying the income tax and NICs (both employees’ and employers’, and an apprenticeship levy if applicable) under PAYE to HMRC on all payments. No employee rights are conferred to the worker.
The contractor effectively receives tax credits against the tax deducted at the source by the fee payer and is free to withdraw the net payment or funds paid to their PSC without incurring any further taxation.
If the engagement is determined to be outside of IR35 by the client or end hirer:
The fee payer continues to pay the PSC gross. The contractor can continue to operate as normal, seeking to withdraw funds from their PSC in the most tax-efficient manner, often with the help of their accountant.
For any contractor working in the public sector, it is the end hirer’s responsibility to determine the IR35 status and inform the contractor or the agency before the contract or work starts – whichever is later.
The Chancellor announced in last year’s autumn budget review that reforms to IR35 will be extended to the private sector.
The following key changes will apply both to contracts in the public sector and engagements with medium and large organisations in the private sector from April 2020 onwards.
In circumstances where the end hirer is a private sector business that qualifies as a small company according to the Companies Act 2006, the current rules will continue to apply after April 2020.
As in the current rules within the public sector, the fee payer is treated as the employer for tax purposes. Before making the net payment to the PSC, the fee payer is responsible for accounting for and paying the income tax and NICs under PAYE to HMRC on all payments.
As in the public sector where the responsibility for applying the legislation shifts from the PSC when IR35 is applied, the fee payer must deduct PAYE tax and NI on 100% of the contract income. There will no longer be a 5% expense allowance.
The legislation introduces a Status Determination Statement (SDS) that must be provided to both the worker and the fee payer.
If the worker or the fee payer disagrees with the SDS they can make suggestions to the client. The client must respond within 45 days to inform the worker or fee payer that either the decision stands and give the reasons why it has reached that decision or give the worker and the employer a revised SDS.
HMRC advises that they are making improvements to the much-criticised CEST (Check Employment Status Tool). They have said that the improved tool will be available for use later in 2019.
The draft legislation introduces a new power for HMRC to collect unpaid PAYE from other parties in the supply chain.
This kind of legislative reform can be daunting. However, there are ways to be proactive in the face of IR35 changes. Here are a few of the elements you should consider or change as an agency or a client:
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