The IR35 reform aimed at workers providing services through their own companies to medium & large sized businesses in the private sector is due to come into effect on the 6th April 2020. IR35 or off-payroll working rules apply if a worker provides services to clients through an intermediary, which can be a personal service company (PSC), partnership, a managed service company or an individual. The rules ensure that workers pay broadly the same tax and NICs as employees who provide services directly to a client or customer.
The reform is consistent with the rules in place for the public sector and shifts the responsibility of determining the employment status of workers from PSCs to their clients. The client or an agency or fee payer if involved, will be responsible for payment of tax and employees & employers NICs to HMRC.
Status Determination Statement (SDS) & Status Dispute Resolution
At the start of engagement, the client is required to issue its determination of the worker’s employment by way of an SDS, provide the SDS to the worker directly and to the agency or a party they contract with. Where multiple agencies are involved, the first agency at the top of the chain is required to pass on the determination to the next agency, and the next agency to the next party until it reaches the last agency or fee payer in the labour supply chain.
The SDS will confirm the deemed employment status of the worker and the client’s reasons for arriving at the decision. It is possible to challenge the determination if the worker disagrees and such disputes will be handled by the client. The worker will need to write to the client and give reasons for disagreeing with the decision. On receipt of such decision, the client should issue a response to the worker within 45 days.
Non-compliance & transfer of tax liabilities
HMRC will seek to collect unpaid liabilities from the agencies or fee payers that are involved in the contractual chain. The liability is considered to move down the contractual chain as each party fulfils its obligations. If payment cannot be collected from the agencies or fee payers, HMRC will seek to collect payment from the end client. HMRC intends to apply the transfer of liability provisions in cases involving tax avoidance and not where there is a genuine business failure and administrative errors.
It is HMRC’s view that such approach would encourage all parties in the contractual chain to follow and apply the rules as intended.
Small Business exemption
In contrast with the off-payroll working rules in the public sector, a small business exemption is in place for end clients in the private sector. Small organisations will not be affected due to administrative burden and capacity issues that will result from the changes.
Withdrawal of the 5% allowance
PSCs will no longer be able to claim an allowance for the costs of administering the off-payroll working rules.
HMRC have offered advice on how businesses can
prepare for the changes before April 2020; they have suggested undertaking a
review of the business’ current workforce to identify contractors, use the
Check Employment Status for Tax service to ascertain if the off-payroll rules
will apply in April 2020, let the contractors know if the off-payroll rules
will apply and put a process in place for establishing if the off-payroll rules
apply to future contracts.[1]
[1] Reproduced with permission of Morgan Soar