EXECUTIVE REPORT
IR35 – Managing off-payroll contractors
IR35 is a set of tax rules that apply in certain circumstances - namely, where a worker provides services to a client through a personal service company (PSC) or an intermediary; and the working arrangements are such that if the worker provided the services directly they would be regarded for income tax purposes as an employee of the client.
Mark Stevens, a senior associate solicitor at VWV, recalls that the IR35 rules were introduced in 2000. “The government was looking to reduce tax avoidance through the use of PSCs across all sectors. This was particularly an issue for contractors in the IT sector, but has now grown to encompass such business sectors as freelance drivers, medical locums and energy consultants.”
However, in April 2017, there were changes to the IR35 regime in the public sector. The reforms, as Mark Stevens explains, “shifted the responsibility to determine the status of the contractor providing services through their PSC to the end user. This meant that if a contractor is deemed to be inside IR35, the public organisation is required to deduct income tax and National Insurance as they do for employees.” Any failure to follow the rules could make bodies liable for unpaid taxes, interest and penalties.
What's changing?
From 6 April 2020, the burden moves to the private sector, so that the client/hirer will need to decide whether or not the relationship with the contractor or their PSC is genuinely that of client/contractor or is actually one of employer and employee. HMRC made a late notice change to the regime; it now only applies to services made after 6 April 2020.
Mark Stevens is clear on the implications: “The client will be obliged to take reasonable care when determining the status of the relationship. The contractor will be bound by the decision concerning status made by the client.”
The new rules will only apply to medium and large private sector organisations from 6 April 2020. Smaller private sector firms will not be affected if they have an annual turnover of less than £10.2 million,
23 Steps to take now
Mark Stevens advises those who engage individuals through PSCs to take a number of key steps. “Firstly, businesses should identify those contracts where they think IR35 may apply. Where it does, they should undertake a status determination in each case.” This requires reviewing the contract and the arrangements for the supply of the contractor's services; this will allow the business to determine the contractor's status and provide a copy of the status determination to the contractor in time for the implementation of the new rules.
The next step is to consider whether new contracts need to be put in place to manage the risks. “If the audit and status determination identify concerns about the status of the consultant, the business should consider whether they need to agree different arrangements,” says Mark Stevens. “If new arrangements cannot be agreed, this may require the employer giving notice to terminate the existing contractor arrangements.” Of course, in cases where there are lengthy notice periods, implementing changes may be complex and early action may help the business manage those risks.
While the April 2020 changes don’t apply to small firms, IR35 nevertheless applies to all firms. So, whether a hirer uses drivers who are officially ‘contractors’, so long as they are told when to work and when leave can be taken, they use the hirer’s van or fix problems on company time, then they’re likely to be an employee. The same might be true if a hirer brings in an IT contractor for, say, three-months - if they meet the tests of someone being an employee, they too are caught. Remember, all that’s changing in April is the responsibility for checking employment status, not the actual rules about tax liability.
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www.gov.uk/guidance/understanding-off-payroll-working-ir35
Advice on IR35 is available at
www.gov.uk
For some years HMRC has been bothered by the loss of tax revenue. And so, set against a desire to be a low tax economy, it is seeking whatever it can from the tax regime in place. Adam Bernstein advises.
or a balance sheet total of less than £5.1 million, and the number of employees does not amount to more than 50. If a business is smaller than these thresholds it does not mean that IR35 is not an issue - simply that the shift in responsibility will not apply. Firms will still have a duty to deduct tax and National Insurance if the contractor is effectively an employee.
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