28 November 2019
From 6 April 2020, new off-payroll legislation will enforce fairness between workers and increase compliance with IR35 tax regulations. For contractors working in the same way as employees of a company, the same income tax and National Insurance contributions (NICs) will apply, instead of them being paid via a limited company or private services company (PSC).
These are not new regulations, having already been applied to the public sector since 2017, however they are new to the private sector having been announced by the Government at the 2018 Budget. This won’t affect all businesses or contractors, but for those companies within the criteria and with ‘deemed employees’ will have new responsibilities.
Do you meet the criteria?
Firstly, you will need to consider the criteria of IR35 which is aimed at medium to large companies.
- Small companies who meet two of the following will not be affected:
- an annual turnover of less than £10.2m
- a balance sheet total of less than £5.1m
- no more than 50 employees.
- The company will no longer be deemed to be ‘small’ if these are exceeded in two consecutive years. The rules will then be applied from the start of the following tax year.
- For unincorporated organisations, the test is on turnover alone and in respect of the entity’s financial accounting period ending at least nine months before the start of the tax year. So for 2020-21, accounting years ended 30 June 2019 or earlier will be relevant.
- The rules won’t be applied retrospectively – the focus is on new engagements.
If you do meet the criteria, will your contractors be inside or outside IR35?
You can determine if the off-payroll working/IR35 rules apply to the individuals who supply their services via PSCs to your company by using HMRC’s Check Employment Status for Tax (CEST). An improved CEST has been launched at the end of November 2019 in readiness for next year.
This will give you some guidance on whether you will need to have processes in place come April 2020.
If they are inside IR35 regulations, what will you be responsible for?
As the end client, you will be responsible for ensuring processes are in place. Firstly, a procedure will be needed so that once the employment status is determined, the decision and reasoning is correctly passed down to the contractual chain – this could mean advising agencies, the PSC, as well as the worker directly. You will also need to consider the GDPR/data privacy impact of this process.
Secondly, you will also need a process to deal with the potential situation of a worker disagreeing with an employment status – HMRC will not get involved with disagreement resolution. Without a process in place, the company may still be liable for tax and NICs.
The payment of the income tax and NICs will usually fall to the third-party agency, however, if you employee the PSC directly then it will also be your responsibility to deduct and remit these to HMRC. It is currently proposed that if any other party in the contractual chain fails to account for PAYE and NICs, the liability will be the client’s as the end user.
We await guidance from HMRC on situations where they will not recover liabilities from the end user, as well as guidance on how companies will fulfil their obligations and how to implement a disagreement process. If you think you will be affected, or would like to know more about the IR35 changes, please contact us or your usual UHY contact to discuss this further.