Off-payroll working in the private sector will soon undergo a series of reforms, HMRC recently announced. The new IR35 rules will come into effect in April 2020.
The new IR35 rules will put most of the responsibility for an off-payroll worker’s employment status, and the payment of tax and national insurance payments, onto the employer. If an organisation is deemed to have failed to meet their new obligations, it will be found liable; however, HMRC suggests that if there is an opportunity to collect tax or NIC from the owing party directly, it will do so. The idea of this ‘supply chain’ is to give incentive for all parties to comply – from the worker to the employee.
In this blog, we will examine the further consultation issued by the government in March 2019, which invites discussion on how off-payroll working rules will function after April 2020.
Will the IR35 Changes Apply to Me?
Changes to the IR35 rules will not apply to small companies. As per the Companies Act, a small company is defined as one that has:
- Fewer than 50 employees
- Annual turnover of £10.2 million (net) or less
- Balance sheet total of £5.1 million or less
If the company – or end client – does not meet at least two of the stated criteria, IR35 rules will not apply. Instead, the personal service company will retain responsibility.
Employment Tax Deductions
From April 2020, the fee-payer will be required to make the relevant deductions for all employment-related taxes for off-payroll workers (just as they would for employees). The off-payroll worker must accommodate this requirement by providing their tax code, national insurance number, and any other appropriate details.
The fee-payer will not need to make deductions for student loan purposes; however, for other employment-related deductions (such as income tax and national insurance contributions), they will need to send the monies directly to HMRC. If HMRC does not receive the monies due, liability will be dealt with via a ‘chain’ system: initially resting with the fee-payer, but potentially being transferred to another party in the labour supply chain. The rules set out in Chapter 10, Part 2 ITEPA 2003 provide for income tax and NIC liabilities to be transferred from one party to another if certain conditions are met (for example, if a client fails to provide an employment status determination). The government is intending to extend these provisions in order to address non-compliance more effectively from April 2020 onwards.
The seamless sharing of information will be paramount to the proposed changes. The government wants to make sure that all parties in the labour supply chain have enough information to be able to comply with their obligations – whilst at the same time appreciating that there is a balance to be struck. The consultation aims to give the government enough background to be able to legislate appropriately: ensuring that employment status determinations (and the reasons for such) are cascaded to all parties, improving compliance, without creating an administrative burden.
Making an Employment Status Determination
The government has stated that it plans to improve the current guidance, with the aim of helping organisations more confidently make employment status determinations (for example, via the online CEST tool).
How to Prepare for IR35 Reforms
The proposed changes could have a substantial impact on various areas within an organisation: from HR to finance to general administration.
In order to prepare, companies should:
- Take strides to identify both off-payroll workers and any workers contracted through intermediaries.
- Conduct in-depth reviews of the current processes for determining employment status – for example, how they determine whether individuals are self-employed or employed. If such tests currently do not exist within the organisation, or if there is any uncertainty, it is highly recommended that the firm seeks specialist advice.
- Review all affected processes – from recruitment to internal guidance – to ensure that reasonable care is being exercised and that there are no gaps in policy.
- Ensure that systems are in place to create a clear audit trail for HMRC, should a review be requested in future.
- Review the costs associated with making the necessary changes and budget accordingly.
It should also be noted that, going forward, public service companies will not be able to deduct a 5 allowance for expenses (when these are being claimed in relation to engagements with medium/large clients).
The scope of the proposed reforms has not yet been finalised, but the advice is clear: anyone who is affected by the changes should begin preparations sooner rather than later. It is also highly recommended that impacted individuals and companies take specialist advice from a tax adviser or accountant now to ensure minimal disruption when the rules come into force.