IR35 TAX REFORM IN THE PRIVATE SECTOR - CLIENTS

Client Guide

In March 2019 the Government announced its intention to tighten the rules surrounding the employment status and the subsequent tax class of contractors and therefore, further changes to Inland Revenue 35 (IR35) will be coming into force.
The Government has confirmed that they intend to roll out changes to the IR35 rules relating to the private sector that have already been applied in the public sector from April 2020.

These changes will apply to most organisations that utilise contractors and the responsibility for assessing a worker’s employment status will pass to the end user. The changing responsibilities may affect companies’ liabilities so it is important that businesses undertake a number of checks to ensure that they are prepared for their future obligations.

The Government opened a consultation on 5th March 2019 with industry bodies including those representing Shorterm. This consultation process closed on 28th May 2019 and after considering the points highlighted during the consultation, HMRC announced that they are pressing ahead and on the 11th July 2019 published the draft legislation. It is possible that there will be some amendments to the legislation but most commentators believe that this will be unlikely. Please find a link below to the 2020 Off-payroll working rules factsheet published by HMRC.

Click here to open HMRC's 2020 Off-payroll working rules factsheet

The aim of this communication is to provide our customers with the key facts relating to IR35.

We would be delighted to speak further and to set out how we can help. We have a dedicated team supported by legal experts that can help with IR35 compliance preparation, solution implementation and ongoing operational compliance management.

Please email Mark Lonergan, Solutions Director on mark.lonergan@shortermgroup.com to arrange a consultation call or meeting.

 IR35 Timeline

IR35 Timeline

What is IR35?

IR35 is tax legislation that was introduced in 1999 and is designed to combat tax avoidance by worker’s supplying their services to clients via an intermediary, such as a limited company or a payroll provider.

Such workers are called ‘disguised employees’ by Her Majesty’s Revenue and Customs (HMRC). If found to be “inside” IR35, the contractors will have to have income tax and national insurance contributions (NICs) deducted at source as if they were employed.

How does a worker check their IR35 status currently?

In March 2017, the UK government produced an online tool enabling workers to determine their employment status. Each contractor should determine their status before accepting an assignment. The link below will give you an understanding of what is assessed:

HMRC's online tool to check employment status for tax

What is going to change?

Currently, in the private sector it is the directors of PSC’s (and their advisors) who perform the IR35 assessment and determine their employment status to conclude if their role falls inside or outside the scope of IR35. From April 2020, the incoming legislation will put the responsibility for determining this status on the end user rather than on the contractor or the agency. The end user may also be asked to provide a reason for status determination by HMRC, the agency or the worker directly.

The government has stated it is aware of a number of concerns that have been expressed by a number of off-payroll workers, including: the lack of a legislative requirement to pass the determination (and reasons for the determination on request) down the labour supply chain; the absence of a statutory process to deal with status disagreements between the client and the off-payroll worker and/or fee-payer; and that businesses may use blanket decisions for the employment status of off-payroll workers in similar roles. The government considered how to address these concerns as part of the consultation by refining the design of the reform to help and encourage organisations to make the correct determination. The government also considered introducing a framework for resolving disagreements over employment status decisions for off-payroll workers.

As a result, the government has published a number of documents including the draft legislation and explanatory notes to sit alongside the new off payroll working rules and therefore Shorterm will be digesting these and seeking advice so that we may correctly interpret these publications and determine a compliant way forward.

What could be the financial Impact of IR35 on the worker?

If a contractor is deemed to be inside IR35, then tax and NI must be deducted at source from the contractors pay which may result in a reduction in their net income. Some workers using Personal Services Company pay themselves by splitting their income between salary and dividends. After April 2020, for contractors that are deemed to be inside IR35, tax and NI must be deducted at source. The worker will also be expected to pay class 1 employees national insurance where as they can currently pay a different and potentially lower class type depending on their declared earnings as a Limited company.

What you can expect from Shorterm

Now that the draft legislation along with explanatory notes and factsheets has been published, Shorterm will be assessing these documents to determine the likely impact these changes will have for our contractors and clients. Shorterm will then communicate the outcome to our clients through a series of workshops and dates and venues will be sent in the near future. If you are unable to attend these workshops then your account manager will visit you to discuss the outcome and impact of any changes.

We will also be communicating across the contractor community and advising them of all changes in the same period so that when the new rules are applied, there are no surprises.

Current ways in which contractors are paid

Currently, a contractor or agency worker can choose one of three compliant methods in which to receive their money. 

Pay Type

DescriptionIs it changing from 2020?

PAYE – Pay as you earn

Most commonly used method of paying income tax and national insurance contributions. The agency deducts tax and national insurance contributions from the workers wages before paying the worker and makes payment to HMRC. 

No Change for PAYE

Intermediary  / Umbrella company

An umbrella company provides payroll on behalf of the contractor and bills the agency (who in turn bills the client) for work completed by the contractor. The umbrella company provides all social contribution and tax payments under the PAYE scheme. The key benefit to the contractor is their tax and accounts are calculated for them by one company despite potentially working on a number of different assignments.

No Change for PAYE

Limited Company – Personal Services Company (PSC)

In the contracting sector, the generally accepted definition of a personal service company is a limited company that typically has a sole director, the contractor, who owns most or all of the shares.

Limited companies can be a tax efficient way for contractors to work, as they tend to split their income between salary and dividends, which means they do not pay, for example, employers or employees Class 1 National Insurance Contributions on a large part of their overall income.

Changes from April 2020

 

The aim of this communication is to provide our customers with the key facts relating to IR35.

We would be delighted to speak further and to set out how we can help. We have a dedicated team supported by legal experts that can help with IR35 compliance preparation, solution implementation and ongoing operational compliance management.

Please email Mark Lonergan, Solutions Director on mark.lonergan@shortermgroup.com to arrange a consultation call or meeting.