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Paul Jennings
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Despite being first introduced in 2000, IR35 (also known as the off-payroll working rules) has rarely been at the forefront of businesses and charities minds. However, 6 April 2020 sees a change to the rules for the private and third sector which means that now all organisations need to pay attention. From that date onwards, if you engage with contractors and off-payroll workers who are in an employment relationship (in all but name), you may be liable for PAYE and National Insurance Contributions in respect of these individuals.
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IR35 is a set of rules targeting the tax treatment of individual contractors who provide their services through an intermediary (most commonly a personal service company – “PSC”). PSCs are often owned and controlled by an individual contractor and an organisation (“the End Client”) will then contract with that PSC to obtain the services of that individual. Sometimes, other entities are involved in the supply chain between PSC and End Client, i.e. agencies. Utilising individual contractors in this way is beneficial for End Clients as they avoid employee National Insurance Contributions, PAYE and the obligation to provide various employment rights. Offering services via a PSC is also beneficial for the individual as they can receive payment in a tax efficient manner by drawing down dividends and offsetting expenses against taxable profits. It was amid the growing concerns that these arrangements were being used for tax avoidance that IR35 was introduced.
In a nutshell, the rules apply in situations where there would have been an employment relationship between the End Client and the individual contractor if the contractor had engaged directly with the End Client rather than through the PSC. Therefore, if there is a genuine self-employment relationship, IR35 will not apply. However, if the contractor would have been classed as an employee, IR35 ensures that broadly the same tax liabilities apply.
For the first 16 years of IR35’s existence, the duty of compliance fell solely onto the shoulders of the PSCs (or other intermediaries). Therefore, PSCs were responsible for determining whether an individual fell within IR35 (e.g. should they be classed an employee) and if so, paying the appropriate employment taxes. In 2017, the rules were amended for the public sector and the burden of determining an individual’s employment status passed to the End Client. The liability for paying the appropriate employment taxes was also moved from the PSC to the Fee Payer which is the entity which pays the PSC (this is sometimes the End Client but can also be an agency). For the private sector, the rules have remained the same with compliance remaining at the feet of the PSC. However, all that is set to change.
In April 2020, the rules are being amended for the private sector and the burden of determining employment status is being moved from the PSC to the End Client. The tax liabilities are also being shifted from the PSC to the Fee Payer. Therefore from 6 April onwards, it is no longer safe for organisations to assume that because they have engaged a contractor via a PSC, there will be no need to pay the traditional employment taxes in relation to that individual.
If your organisation engages with contractors and off-payroll workers you could be impacted by the IR35 changes as it is likely that you will be engaging some individuals via PSCs.
However if your organisation is classed as a small business, IR35 does not apply and PSCs continue to be responsible for compliance with the regime. A small business is defined in the Companies Act as an organisation which meets two of the following three criteria:
For charities it is important to note that the definition of ‘turnover’ is intended to have the same meaning as defined in Section 474 of the Companies Act (turnover is the amount derived from the provision of goods or services within the company’s ordinary activities after deduction of trade discounts, VAT and other relevant taxes). Therefore, charities which receive donations and other voluntary income which does not derive from the provision of goods and services, should not count this towards their turnover.
Unfortunately, you can’t just rely on what the contract says. To get to the crux of this question, organisations will need to consider the reality of all aspects of an individual contractor’s working arrangements. To assist with this, HMRC has developed an online tool to help End Clients check the employment tax status of their contractors (Check Employment Status for Tax (CEST)). However, as determining an individual’s employment status is a complex exercise involving the examination of key employment case law, we would recommend seeking legal advice and carrying out further analysis, particularly in borderline cases.
However, the following questions may be useful in making some initial determinations as to whether an individual is likely to be caught by IR35:
If you reach this conclusion, the first thing to do is document your reasoning and the factors that led to that determination. This is because IR35 requires End Clients to provide individual contractors (and if relevant the agency or any other entity involved in the supply chain) with a Status Determination Statement (“SDS”) which is essentially a document clarifying whether or not the End Client believes the individual should be treated as an employee for tax purposes and the reasons for reaching that conclusion.
Once the SDS has been provided to all relevant parties, it is a bit of a waiting game as all organisations must have in place a process to enable the individual contractor (or if relevant, the agency) to challenge the status determination. If a challenge is made, the End Client must respond within 45 days, either confirming the original determination or replacing it with a new one. Regardless of the outcome, the End Client must provide reasons for their conclusion. If the End Client fails to respond within 45 days, the tax liability will become their responsibility even if they are not the Fee Payer.
It is worth noting that if you conclude that there is an employment relationship for tax purposes, it does not necessarily mean that there is an employment relationship for employment law purposes ( although it is often indicative).
Dealing with the roll out of IR35 to the private sector is no small task and there are several preparatory steps you can take now to ensure that your organisation is ready for 6 April 2020.
Last but by no means least, here are our top tips on how to stay compliant with the IR35 rules.
Here at Bates Wells we have a strong team of experienced IR35 experts who are already helping organisations understand and prepare for the changes ahead of April 2020. We are happy to assist with all stages of the compliance process including:
We also offer an in-depth webinar (‘An essential guide to IR35’) and supporting materials such as an employment status checklist and a template SDS. To register for our webinar on 25 February, click here. If you have any questions, or require any assistance, please don’t hesitate to contact Paul Jennings ([email protected]) or Shadia El Dardiry ([email protected]).
This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.
All content on this page is correct as of February 5, 2020.