The Government recently announced its intention to conduct an in-depth review of the proposed changes to IR35 regulations due to come into force on 6 April 2020 amid concerns that it may have a negative impact on individuals and businesses.
What are IR35 rules?
The IR35 legislation was originally introduced in 2000 but, in 2017 the rules were significantly changed in respect of Public Sector employers, engaging workers ‘off payroll’ via third party intermediaries. This was intended to tackle perceived non-compliance with the IR35 rules by workers providing their services via Personal Service Companies (PSCs). These rules are now being extended to large and medium sized employers in the private sector.
From 6 April 2020 large and medium sized businesses will become responsible for determining the potential “employment status” of workers who provide their services via intermediaries, i.e. a PSC, agency or another intermediary, and whether the new IR35 Off Payroll rules apply to those workers. Where the end user of the worker concludes that the new rules do apply, i.e. if the worker was not providing the services via an intermediary they would be regarded as an employee, the business, agency or third party paying the worker’s PSC, must deduct PAYE tax and employee NIC and pay employers NIC.
To read the proposed changes to off-payroll working from April 2020, click here.
Government review of IR35 Off Payroll Rules.
Many contractors were hopeful that the review, first announced during the recent General Election, would consider postponing, or even scrapping the proposed extension of the legislation to the private sector. However, as widely anticipated, it has been announced that the purpose of the review and consultation is to address concerns raised about how changes to the Off- Payroll Working rules will be implemented, rather than reviewing the legislation itself, and is gathering evidence from affected individuals and businesses to ensure smooth implementation of the reforms.
Final legislation governing IR35 regulations will not be revealed until the Budget on 11 March, however, it is unlikely that this review will affect the outcome from the draft legislation in place.
Will changes to IR35 regulations affect me?
Individuals – If you’re working as a sole trader, through an umbrella company or an employment agency, and you are already paying PAYE tax and Class 1 NIC on your earnings, you will not be affected by these changes.
However, if you are providing your services to a client, either via your PSC or another intermediary such as an agency, and you are not paying PAYE tax and Class 1 NIC on that income, you are likely to be affected by the new rules. If your services are deemed by the end user’s assessment of the working practices in place to be more akin to an employee, PAYE tax and Class 1 NIC will be deducted from your invoices.
Businesses – For large and medium private sector businesses, this will be one of the biggest changes to their Employment Tax processes for years. Affected businesses using workers off payroll (provided by a PSC, agency or another intermediary), will be responsible for determining the “employment status” of the workers, and if they look akin to employees, the new rules will apply. The business paying the worker’s PSC will be responsible for deducting PAYE Tax and Class 1 NIC, and they will also be liable to pay Employer NI contributions in respect of those payments.
If the end user is a small business, it will be exempt from operating the new rules – A business is defined as ‘small’ if they can meet 2 or more of the following conditions:
- An annual turnover of not more than £10.2 million;
- A balance sheet total of not more than £5.1 million;
- 50 employees or less
HMRC mailshots and focus
HMRC are already writing to employers who they have identified as being potentially affected by the new legislation. Whilst the letters provide details of the changes, and offer some advice on how to prepare for the new rules, they are also a clear indication that many businesses are already on HMRC’s ‘radar’. Businesses, therefore, need to be certain that their processes for identifying workers employment status are fit for purpose.
In addition to the first letter, a significant number of employers have also been sent a questionnaire by HMRC requesting information such as; the processes that the business has in place to ensure compliance with the new rules, the number of workers engaged via intermediaries, and the type of work undertaken.
How we can help
If you have concerns about the new legislation, how it will work in practice, or the impact that it may have on you or your business, please do not hesitate to get in touch with a member of our dedicated Employment Tax team. We can help clarify who is responsible for managing and ensuring the correct and compliant implementation of the new rules, and also offer tips on best practice.
Alternatively, Laura Parr and Mick Verney, experts from our Employment Tax team, are running a series of comprehensive seminars, intended to equip businesses with up to date information and practical advice relating to Employment Tax, including changes to IR35 regulations. To find out more or book a space, click here.