The IR35 regime was introduced in 2000 by HMRC to avoid individual contractors escaping paying tax as an ‘employee’ (which, for those HR professionals out there, includes employees and workers) by operating through a personal service company.
Under the rules, if the contractor would be deemed to be an employee of the client but for their personal service company, the client must pay income tax and national insurance contributions as if they were an employee (for example, if client engages an individual contractor to provide regular, personal and continuous services via their personal service company, the client may be liable to deduct income tax and NICs). Public sector clients have been required to deduct tax at source under PAYE when IR35 applies since 2017. This means that the responsibility for determining the employment status of individual contractors in the public sector for tax purposes has rested with the client or “would-be” employer.
On 5 March 2019, the government published its policy paper and consultation on extending the rules on deducting at source to include the private sector from April 2020. Companies that qualify as “small” under existing company law will be exempt from the new rules, meaning that a significant percentage of UK companies shall be outside the scope of the extended rules. By way of background, a business with two or more of the following features in a year is regarded as “small”:
a) Turnover of £10.2m or less;
b) £5.1m or less on its balance sheet;
c) 50 employees or less.
Whilst we await the outcome of the recent government consultation (which closed on 28 May 2019), companies that use contractors should review their current arrangements with consultants and intermediaries and start to make preparations ahead of next year.
HMRC has developed an online tool for assessing employment status for tax purposes, which is widely used by public sector bodies. If accurate information is entered into the tool and you act in line with the determination, HMRC will stand by the result. It is therefore important that you keep a record of the result generated by the online assessment. However, it is also important to note that this test is different to the one applied for employment law purposes, but if the client is required to deduct tax at source they should also consider the risks of the individual later claiming eligibility for holiday pay, statutory sick pay and the like.
HMRC has also issued guidance on what organisations caught by the changes should do to start preparing for them. To summarise HMRC suggests they spend time now:
• Identifying those individuals supplying their services through intermediaries;
• Determining if IR35 will apply to any contracts which expire after 6 April 2020;
• Talking to contractors about whether the rules will apply to them; and
• Putting processes in place to determine whether IR35 will apply in future.
The link to the guidance is here.
Whilst April 2020 may seem a long way off, and the way in which the changes to IR35 will be implemented in the private sector is still not entirely clear, it will be important for organisations to get assessments of whether IR35 applies to individual contractors’ right. Preparing now will put organisations in the best place when it comes to doing this.