IR35: HMRC presses on with changes 

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

IR35: HMRC presses on with changes 

Introduction

HMRC has confirmed in Finance Bill 2019/20 that the IR35 changes scheduled to take effect from 6 April 2020 will happen as anticipated. This is despite increasing criticism and calls for a delay in implementation.

The changes mean that the current rules for off-payroll working in the public sector will be extended to medium and large private sector firms.

Finance Bill 2019/20 published further details including draft legislation.

Our firm hires the services of contractors – what should I do now?

If you firm currently hires the services of contractors then you should prepare for the new rules now.

You should ensure that you have reviewed these arrangements and ensure you’re your contractors’ statuses are properly assessed. This will necessarily take in working patterns and contracts.

Clearly, where applicable, it will be necessary to facilitate the deduction and payment of employment taxes (income tax and NIC) to HMRC.

It is worth noting that he existing IR35 rules for the private sector will continue to apply for small businesses.

Background

There has been growth in people working through their own personal services company (“PSC”) to provide self-employed contracting services to businesses.

It is the Government’s view that many workers providing their services through personal service companies (“PSC”) are not genuinely operating as self self-employed contractors.

Instead, they are operation as disguised employees. As such, it the Government’s view that these contractors should be paying higher employment taxes.

The changes are not really technical changes but more to do with who is responsible for compliance and ultimately where the risk of getting things wrong abide, which is not with the businesses using the contractor.

HMRC has had a hopeless time in the Courts over the last decade on IR35 cases. This leads one to assume that the Government and HMRC expect the private sector to air on the side of caution and bring cases within IR35 on a ‘safer rather than sorrier’ approach.

New HMRC information on key aspects of the changes

As stated above, when the new rules are effective from April 2020, businesses other than small businesses which engage a workers through PSCs (directly or indirectly) will become responsible for determining whether deemed employment status under IR35 applies. They will also be responsible for communicating that decision and the reasons why to the members of the supply chain and responding to disputes over the determination within set limits.

If the decision is within IR35 then the client of the contractor is responsible for deducting and paying the employment taxes to HMRC. However, in some cases, this liability may be transferred to other parties in the supply chain.

Draft legislation was published in Finance Bill 2019/20.

Key points

  • The client is responsible for deciding whether the contractor is within IR35: They must determinewhether the worker would be an employee if the business contracted directly with him/her;

  • The client must provide what is called a Status Determination Statement (“SDS”): The SDS sets out whether IR35 applies and the reasons why. It is provided to the party that it contracts with for the supply of the worker and the worker;

  • Where the client has not issued an SDS: Up until the point that the SDS is issued to the worker (or an agent) the client is liable for operating PAYE.;

  • The client is required to comply with a “Status Disagreement Process” (“SDP”): They must comply with the SDP if either the worker or ‘employer’ disagrees with the SDS. The client has up to 45 days to confirm its decision under the SDS. Alternatively, the client may withdraw the SDS and issue an alternative one along with the reasons why;

  • Generally, a failure to comply with the SDP will render the client liable for deducting and paying employment taxes to HMRC: As such, a client will need to have a. transparent procedure or dealing with disputes / complaints;

  • Where a direct engagement is within IR35 then the client is responsible for deducting employment taxes from payments to the PSC and pay it over to HMRC.

Supply chains

Where there are additional parties in a supply chain then each additionalparty in the labour supply chain is also responsible for passing on to the next party the client’s SDS.

If that additional party is the one paying the fees then it must deduct and pay the relevant employment taxes to HMRC.

If an additional partyfails to ‘cascade’ down the SDS to the next party in chain then it is the one with the liability for deducting and paying the employment taxes..

Small companies

It has been confirmed that small businesses will be exempt from the changes and, as such, the PSC itself is responsible for determining its status.

The following thresholds apply in determining whether a company is small or not:

  • Annual turnover: not in excess of £10.2 million

  • Balance sheet asset: not in excess of £5.1 million

  • Number of employees: not in excess of 50

Non-compliance

It is expected that when the PAYE regulations are published these will provide HMRC with the power to recover any taxes unpaid under these rules from others in the supply chain.

HMRC guidance

HMRC is promising to make guidance available later this year. We are told that this will include how an end-user client can fulfil its responsibilities under the changes.

It has also promised that it will have improved the much derided HMRC Check Employment Status for Tax (“CEST”) tool up and running by April next year.

 

If you have any queries about IR35 then please do get in touch.

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