The government has decided that the reform of the off-payroll working rules in the public sector will be introduced for private sector assignments from 6th April 2020. This means an end-client will be responsible for determining the employment status of the contracts it enters into with personal service companies.
In March 2019, the government published a further consultation on how the reforms will be implemented. It is also taking the opportunity to update arrangements for the public sector to ensure the rules are consistently applied across both areas.
Then, on 11th July, the government published draft legislation for the 2019-20 Finance Bill, including a statement that read: “off-payroll working rules will ensure that two people working side by side in a similar role for the same employer pay the same employment taxes.” The draft legislation was open for consultation until 5th September 2019.
The draft legislation included a policy paper on rules for off-payroll working from April 2020. There was no change to previously announced plans in this paper, but more detail was given on the implementation of the planned changes.
The new rules will not apply to small companies (end clients) as defined by the Companies Act:
Annual Turnover of less than £10.2 million
Balance sheet total less than £5.1 million
Number of employees less than 50.
If an end client does not have at least two of these characteristics, the rules will not apply, and the Personal Service Company will remain responsible for determining the IR35 status of its contracts with an end client.
HMRC stated in its policy paper that they expect three categories of businesses to be affected by the new rules:
Individuals supplying their services through an intermediary, such as a Personal Service Company (PSC), and who would be employed if engaged directly.
Medium and large-sized organisations (as specified above) outside the public sector that engage with individuals through PSCs. Public sector organisations will also be affected by changes to improve the operation of the reform.
Recruitment agencies and other intermediaries supplying staff through PSCs.
It also stated that they expect this to impact 170,000 individuals working through their own company. Up to 60,000 engager organisations (end clients) and approximately 20,000 recruitment agencies.
The government believes information should be shared seamlessly across the labour supply chain. It is proposing legislation requiring the end client to provide an employment status determination to the party they contract with before a contract starts or before the off-payroll worker starts to provide their services. This could be an agency or a personal service company depending on the nature of the engagement.
Addressing non-compliance with IR35 rules
The fee-payer will be responsible for sending the income tax and National Insurance Contributions (NICs) due to HMRC. Where HMRC does not receive the tax due, the government proposes that the liability should initially rest with the party that has failed to implement the new rules. For example, if an agency in the labour supply chain failed to send the employment status determination to the worker, the agency (as fee payer) would be liable for any income tax and NICs due. Similarly, if a fee-payer, having received the determination failed to make deductions from any payments made to the worker’s personal service company, then it would become liable.
If you’d like to know more about IR35, you can visit our comprehensive, jargon-free IR35 hub. From here, you can find all of our related articles, our business guide, and further contact points for more information.
Employment Status determinations
The government does not believe there is any evidence from the introduction of new rules in the public sector of a blanket assessment of employment status being inside IR35 rules. The government believes that requiring the end client to provide the off-payroll worker and the fee-payer with the reasons for the employment status determination, will reduce the scope for any blanket assessments to be completed.
The government is proposing an appeals process led by the end client to address any disagreements and to evidence that reasonable care has been taken in arriving at an employment status decision.
Check Employment Status for Tax (CEST) service
The government plans to improve its guidance so organisations can confidently make employment status determinations using the online CEST tool to enable those working through personal service companies to assess and understand their employment status.
We have our own IR35 calculator that you can use to help determine whether your own contracts are at risk of being inside IR35 rules.
Responsibility for employment tax deductions
The fee-payer must make appropriate deductions for all employment taxes (income tax, NICs, and the Apprenticeship Levy) in the same way as for an employee. The off-payroll worker is legally required to provide their National Insurance Number, tax code and identity details to enable the right tax to be deducted. The fee-payer will not be required to make deductions for student loans purposes.
As with public sector engagements, a personal service company will no longer be permitted to deduct a 5% allowance for expenses in relation to engagements with medium and large-sized clients.
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