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IR35 Off-Payroll Working in the Private Sector – Are you ready for April 2020?4th December 2019 Employment
This blog has been co-written by Sue Ollerenshaw, Director of Efficient Employment Tax Solutions Limited and Ruth Pearson, Trainee Solicitor at JMW Solicitors LLP.
One of the ‘hottest’ topics of the moment is “IR35” and the extension of the off-payroll working rules to the private sector. The new legislation is designed to increase compliance as HMRC estimate that currently 90% of businesses are not complying with the existing rules.
The final legislation is unlikely to be published until early next year and may not even be finalised before it comes into effect. Depending upon the outcome of the General Election, it is unlikely implementation will be postponed again so businesses need to work with the information we currently have. It is imperative that all affected businesses carry out checks to prepare for April 2020. The legislation, whatever it may look like, is very likely come into force on 6 April 2020. It will apply to any payments made after the start date including any pre-existing contracts. Businesses must be ready, with the appropriate measures in place to avoid being caught out by the new regime.
This legislation has been operating in the Public Sector since 2017 and many organisations have incurred significant liabilities because they were not ready to act from day one.
So, what is changing?
From 6 April 2020, the responsibility for determining whether IR35 applies will shift from the contractor’s company to the client or in more complex supply chains the “end user”. The end user must decide whether, in the absence of the contractor’s company, the hypothetical relationship would be an employment contract or a contract of services. It then has to provide a “status determination statement” (SDS) setting out this decision and how it reached it. It will be necessary for the SDS to be passed down the supply chain to the contractor. Unlike, the existing public sector rules, the contractor has a right of appeal if he or she disagrees with the results. The decision must be revisited and the outcome communicated.
End users who are small companies can breathe a sigh of relief as the new IR35 changes will not apply to them, provided that two of the following requirements are satisfied:
- Annual turnover of not more than £10.2 million
- Balance sheet total of not more than £5.1 million
- Not more than 50 employees.
End users who contract for outsourced services rather than the supply of labour will also be unaffected. This could mean the next party in the supply chain is responsible, for example a recruitment company.
If the end-user determines that IR35 does apply, the responsibility for accounting for tax and national insurance will transfer from the intermediary to the “fee-payer”. This will normally be the organisation paying the contractor’s limited company. The fee-payer in theory will only be liable for paying PAYE and NIC plus accounting for the Apprentice Levy and no other statutory payments etc. However, given that the tests for employment status are similar for employment law, contractors may also try to claim worker’s or employee’s rights.
It will also be necessary to separately identify these individuals from employees when completing RTi forms and additional information will be required. It should also be borne in mind that current social security legislation prevents the employer’s NIC liability from being recovered from the employee. So, contracts may need to be renegotiated to prevent employment tribunal claims.
If the correct procedures are not followed, the liability for accounting for any underpaid tax and national insurance (plus interest and penalties) will transfer up the supply chain. An audit trail will be key to demonstrating “reasonable care” has been taken to mitigate such liabilities.
What do you need to do now?
Check Employment Status for Tax (CEST)
The HMRC website tool can be used to check employment status for tax purposes. It requires users to answer a series of questions and HMRC will be bound by the outcome provided the information entered is accurate. This should include not only contractual terms but what happens in practice. The Courts have indicated over the years that determining status is not as simple as completing a tick list, that different factors need to be given different weight and one needs to look at the whole picture. There have been a few recent Tribunal decisions which demonstrate how similar cases can result in different results. Following feedback from various bodies, CEST has been updated and new guidance issued. The updated version will still not always give a definitive answer. If using this tool, there are options for the hirer, agency and worker to answer the questions and be provided with a result. It would be prudent, for all parties to answer and then compare the results to identify any perceived discrepancies. It will also be important to reassess regularly as frequently problems occur with “scope creep”. HMRC have cautioned that they will not be bound by a decision if the tool is manipulated.
Preparing for 6 April 2020
Businesses should ensure that they use the following months wisely to identify how their supply chains will be affected. Technology will be useful but will not solve all of the issues. All affected businesses should pull together a team from procurement HR, payroll, accounts payable etc to understand what changes need to be made to procedures and software systems. It will also be necessary to ensure that appropriate training is conducted in the run up to 6 April and contracts be updated for these changes.
In practice, there will only be a marginal impact on worker’s businesses that are currently compliant. Companies who are not currently complying will potentially suffer a reduction in net pay. Higher skilled workers or sectors when demand is greater than supply, will try to renegotiate rates. Who picks up any additional costs will be down to negotiations and commercial pressures.
For businesses who cannot fully recover VAT, there may be savings which will offset the employer’s NIC liability.
Other business may consider adopting a different business model to benefit from the exemption for contracted out services. While this may involve greater risks, it could increase profitability.
It is unlikely that there will be a “one size fits all” model and no doubt that there will be several new ideas being marketed to solve the IR35 problem. Taking timely and appropriate professional advice will be key to maintaining market share and profitability.
This bulletin is for general guidance only and should not be used for any other purpose. It does not constitute and should not be relied upon as legal advice.