The IR35 rules for off-payroll working are due to change on 6 April 2020.
This rule change will mainly affect contractors who operate through their own personal service companies (PSCs). It’s important to be aware of these rules – they could affect you.
The IR35 rules were changed for public sector contracts in 2017. That rule change will be expanded into the private sector from 6 April. The new rule moves the responsibility for complying with IR35 from the contractor to the client who uses their services.
This is a complicated topic that can be difficult to understand, so we’ve broken down HMRC’s official guidance into sections. Want to skip to a particular section of this article? Click on the list below.
The off-payroll working rules (IR35)
HMRC uses the term off-payroll working to describe the following situation.
The individual who does the work (the worker) provides their own personal services – via an intermediary, their own private company, or personal service company (PSC) – to an end client who needs the work done.
They should meet this test – if the worker were actually providing services directly to the end client, the worker would meet the employment status tests to make them an actual employee of the end client.
These rules are known as IR35. If the rules apply, tax and NI contributions must be deducted and paid to HMRC.
IR35 rules before 6 April 2020
If you’re a worker and your client is in the public sector, it’s their responsibility to decide your employment status. They should tell you their decision.
IR35 rules from 6 April 2020
All public sector clients and medium and large-sized private sector clients will be responsible for deciding if the IR35 rules apply.
If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status, and if the IR35 rules apply.
Broadly, a client is classed as small unless two of the following criteria apply:
• Their annual turnover is more than £10.2m.
• Their average number of employees is more than 50.
What does IR35 mean for the intermediary and the worker?
The new rules apply to payments made on or after 6 April 2020, for services provided on or after that date.
When work is done for a public sector client, or for a medium to large-sized client in the private sector, the client is responsible for deciding on the tax status of the contract.
If it’s judged to be disguised employment, any payments made to the worker’s PSC under the contract must be made after the deduction of PAYE and National Insurance.
The organisation who pays the worker’s PSC (the fee-payer) must deduct the tax and NI via their payroll. This could be either the client or the agency.
What happens to income after tax and NI are deducted under the new IR35 rules?
This is a complex question.
The income that the worker receives from the fee-payer will be shown as employment income on the worker’s tax return – even though it’s paid to the worker’s PSC. Any amount which the PSC pays to the worker out of this income will be tax and NI free.
Although the full contract fee will be invoiced by the PSC to the client, PAYE and NIC will have already been deducted from it when received, so the PSC will be paid a net figure.
The fee has already been taxed, so there is no further corporation tax due by the PSC on this net payment.
If the PSC has been paid by other contract sources, and these weren’t deemed to be employment income, then these receipts will be charged to corporation tax, as usual.
The amount of take-home pay that the worker receives could be affected.
Reviewing contracts for IR35
Medium to large-sized private sector clients – and all public sector clients – must review each contract to decide whether it falls under employment or self-employment tax status.
After reviewing the contract, the client must issue a Status Determination Statement (SDS), including the reasons for the decision.
This decision can be challenged at any point. Either the fee-payer (the organisation who pays the worker’s PSC) or the worker can challenge the status determination. The client must have a process in place to handle the disagreement.
HMRC and IR35
The Check Employment Status for Tax (CEST) tool will offer HMRC’s opinion on whether an engagement is employment or genuine self-employment.
CEST can also be used to check the status of contracts with public sector and private sector clients.
The tool isn’t perfect and has been criticised for not applying all of the required tests for IR35. HMRC are working on improving CEST, but private sector businesses are already beginning to review off-payroll contracts before the start date in April.
Will the new IR35 rules be delayed?
Businesses and contractors are encouraging the Government to delay the start date to 2021 to allow more time for the IR35 legislation to be implemented.
Despite this pressure, the Government have made little comment on the prospects of a delay. Until then, you should proceed as if the new rules will go ahead on 6 April 2020.
How Appleby Mall can help
Please get in touch if you have any queries or would like any clarification on this complicated topic. We can assist with reviewing contracts, if this is required.