Preparing for IR35 in the Private Sector
New IR35 off-payroll rules are due to come into force in April 2020, affecting a significant number of businesses. This may seem a long way off but the time for UK businesses to put their preparations in place is now. What should you be doing to get ready for these new rules? rradar tax expert Caroline Lamyman takes a look at what’s involved and the steps to take.
What is IR35?
IR35 is tax legislation that is designed to fight against tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, where the worker would be an employee if the intermediary had not been used. The worker, in effect, becomes a ‘disguised’ employee.
This can save the engaging organisation a significant amount of cash as they no longer have to pay employers’ National Insurance Contributions, and it also means they don’t have to offer any employment rights or benefits.
A business will need to consider the off-payroll working rules if they provide services to a client through their own intermediary or hire people who provide their services through an intermediary to public (and from 2020, private) sector clients. The intermediary can be a worker’s own limited company known as a ‘personal service company’, a partnership or another individual.
There are different roles and responsibilities for applying off-payroll working rules depending on whether a worker provides their services in the public or private sectors.
New rules came into force on 6th April 2017 and public authorities are now responsible for deciding if off-payroll working rules apply in the public sector. The person providing services through their own intermediary will need to provide information to the public authority to help them make their decision. If the rules apply, the public authority, agency or other third party who is responsible for paying the worker’s intermediary must deduct tax and class 1 national insurance and pay and report it to HMRC.
The private sector
The IR 35 off-payroll rules will be extended to the private sector from 6th April 2020, with medium and large private sector businesses based in the UK being responsible for checking the status of any contract worker. They will also need to pay the tax and national insurance due if the rules apply.
The new off-payroll rules will not apply to small businesses. The government has indicated it intends to use similar criteria to define ‘small businesses’ as found in the Companies Act 2006 – that is, a company which meets at least two of the following tests:
Annual turnover of not more than £10.2 million;
Balance sheet total of no more than £5.1 million; or
Average number of employees of no more than 50.
As a result, small businesses will remain subject to the current IR35 regime post 2020 and will not need to consider the employment status of the people they engage via personal service company’s or deduct employment taxes from the fees paid to them.
When the business is deciding if the off-payroll working rules apply to a contract or engagement, they must work out the employment status of the person providing their services. The off-payroll working rules will apply if the person providing their services would be an employee if there was no intermediary or is an office holder for the client.
The business needs to assess each engagement by considering what the relationship between the client and the worker would be if there was not an intermediary involved. Information about the working practices for the engagement helps to decide what the employment status is, and not relying on any label, description, or job title. This must be done for each individual contract or engagement, and it is important to ensure that the business considers this again when the contract is renewed or changed.
What to do
1. Preparation: Taking the time to prepare sooner rather than later means your organisation need not necessarily change the way it utilises contractors. This will ensure your organisation is able to access and compete for the temporary skills you need to support and deliver successful projects.
2. Risk Assessment: Audit your interim workforce to ascertain your level of risk. A health check may be required to determine how IR35 changes may affect your organisation and help develop a solution if required.
3. Long-term strategy: Think about how you will assess and arrive at a determination for each assignment and maintain control and visibility over how contractors are hired and utilised.
IR35 changes will take time to understand, as well as have cost implications. Businesses will be concerned that projects are delayed due to the time taken to understand these new rules.
Proper audits need to be undertaken and, where necessary, expert advice used so that businesses will be able to illustrate that they are taking 'reasonable care' with their IR35 assessments.
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