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19 December 2018
The chancellor has confirmed that with effect from 6 April 2020, businesses in the private sector which engage contractors (ie, individuals who supply their services via their own company or partnership (the intermediary)) will be responsible for determining whether the IR35 rules apply. If the business considers that IR35 applies, the person paying the intermediary will be responsible for operating pay-as-you-earn (PAYE) and national insurance contributions (NICs) on the fees it pays to the intermediary.
The chancellor's announcement(1) follows a consultation issued earlier this year on tackling non-compliance with the IR35 regime and will generally align the position in the private sector with the position that currently applies in the public sector.(2)
With effect from 6 April 2020, where an individual provides their personal service through an intermediary to a client (whether directly or via an agency):
This is a significant change for the private sector, which will require a substantial investment in terms of both cost and time. There was widespread speculation that the change would apply from April 2019, so it is good news that the new rules will not take effect until April 2020. Businesses need time to prepare, both in terms of being able to properly assess a contractor's employment status and also to be able to deduct tax and NICs from consultancy fees.
Key issues are:
To help determine whether IR35 applies in the public sector, Her Majesty's Revenue and Customs (HMRC) launched an Employment Status Service online tool (CEST). Many public sector clients use this tool as it has the advantage that (in the absence of fraud) HMRC is bound by the result pending any change in the circumstances. However, CEST has been severely criticised as being biased towards a finding that IR35 applies and there has been at least one case where the tax tribunal overturned a finding of employment under CEST. In addition, in about 15% of cases CEST does not produce an answer at all, meaning clients still have to determine the individual's employment status using the normal status tests.
Where IR35 applies, the fee payer business will face additional employer NICs (and apprenticeship levy) costs. The intermediaries themselves will also face additional costs. Agreement needs to be reached as to who will bear these additional costs and contracts re-negotiated accordingly.
Fee payers need to ensure their systems can deal on the one hand with operating PAYE and NICs on the VAT exclusive amount of the intermediary's fees, and on the other hand ensuring that the intermediary is paid the correct net amount plus the correct amount of VAT.
'Small' business will be exempt from the new rules. No information has been released yet on which businesses will qualify as small for these purposes.
Businesses using individuals who supply their labour via an intermediary should start preparing now for the implementation of these new rules, including:
Status is a hot topic at the moment, largely driven by three things:
The phrase 'employment status' can mean two things, depending on who is using it:
Similar (but not identical) tests are used for both purposes and the results are usually similar.
Importantly, this new proposed change to IR35 is aimed at determining employment status for tax purposes, not for employment purposes. In short, while some consultants would need to be paid through the fee payer's PAYE payroll, this does not mean that they also need to receive holiday pay, pension provision and other employment benefits.
It is important to note that while clients will be involved in the assessment of tax status under the proposed new rules, the individual and any intermediary will presumably also have a view on their status. An individual who strongly believes they are self-employed for IR35 purposes and is running their business in order to be IR35 compliant is not going to simply accept the client's view on status if they disagree and will be financially disadvantaged. Professional or skilled consultants are likely to be well-advised on this issue and to have strong views on their own status.
It remains the case (from both a tax and an employment perspective) that regular auditing of self-employed contractors who work within a business is best practice, in order to avoid loose practices that treat contractors the same as employees, which risks creating an indication of employee status rather than self-employed status on both the tax and employment tests. This new approach does not change the previous status tests or risks; it simply creates a further mechanism for HMRC to identify when IR35 is not being met.
For further information on this topic please contact Victoria Goode or Alison Clements at Lewis Silkin by telephone (+44 20 7074 8000) or email (firstname.lastname@example.org or email@example.com). The Lewis Silkin website can be accessed at www.lewissilkin.com.
(1) See page 42 of the Budget 2018.
(2) For further information on IR35 and how the rules apply in the public sector, see "New PAYE and NIC rules for 'off-payroll' workers in public sector confirmed" 29 November 2016.
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