HMRC have recently published the Finance Bill 2019/20 which introduces new off-payroll rules which are set to come into force on 6th April 2020.
Consistency & Fairness
The changes include an extension of the current IR35 rules which at present apply only to the public sector, into the private sector. As a result, HMRC will now be able to collect income tax and national insurance payments where a contractor engaged in work via a Personal Service Company (PSC) or other intermediary is essentially an employee in all but name. The objective of this policy is to ensure consistency and fairness amongst those working in a similar way.
Small organisations will not be subject to the new off-payroll working rules. Medium to large organisations should however anticipate and prepare for the effects of these changes well ahead of April next year.
What is considered a small organisation?
In order to be considered a small organisation and thus exempt from the rules, a company must meet at least two of the following criteria:
- an annual turnover of less than £10.2m
- a balance sheet of less than £5.1m
- no more than 50 employees.
Distinguish between employee & contractor
The onus is on the employer to distinguish if an individual should be treated as an employee or a contractor, notwithstanding that they may be engaged through a PSC or other intermediary. Should they decide it is the former they must deduct income tax and national insurance from the payments made in the same way they would if the individual was a directly employed employee.
The Government has issued a test for employers to use to check if an individual engaged on a PSC is a "contractor" or an "employee" for IR35 purposes. The Check Employment Status for Tax (CEST) test is available online and consists of a series of questions for the employer to answer in relation to the individual arrangement. HMRC have undertaken to honour the result of this provided that the information given is accurate. This will assist employers in making a status determination thus ensuring greater certainty in relation to a worker's IR35 status. There is, however, no obligation on employers to use the CEST test.
How can employers prepare for the changes?
There are other ways in which employers can prepare for these changes and decide how they will make their status determination decisions. Blanket or role-based determinations should not be used, however, as these will be deemed non-compliant. Each decision is to be taken with "reasonable care" with detailed explanations as to why each decision has been taken. This process can involve having discussions with the individual and taking their views into account when making their status determination. When undertaking assessments of this sort it is recommended that diligent and comprehensive notes and explanations are kept on file, for future evidential purposes.
There is currently no intention to create an independent appeals process, and therefore, once an employer has determined the individual's IR35 status, there is only a 'Client Led Disagreement process' available to the individual to dispute this. Should a worker disagree with the decision they have 45 days to either change the decision or affirm it, giving reasons as to why.
Time to properly assess & prepare
It is estimated that this new regime could affect up to 170,000 people who are contracted through their own PSC and they could see a decrease as high as 20% in what they earn (and consequent increases in return to HMRC). This impact is undoubtedly significant. It is strongly recommended that contractors properly assess their own status to prepare for these changes and that employers begin to prepare their assessments as to their contracts and how the status of these might change after April 2020.
This brings further complexity to the assessment of status in the workplace. IR35 is ultimately a taxation issue, whilst employment status is a matter of employment law for the purposes of employment rights and employment legislation. It is possible for a person to have one status for tax purposes, and another for employment rights purposes. As a result, when conducting a comprehensive review of employment relationships, often both tax and employment law advice is required.
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