Iain Rankin considers how the new ‘off-payroll’ rules to the private sector from April 2020 will affect contractors and their clients.
The intermediaries legislation (IR35) was introduced in 1999 with the intention of removing the tax advantages of providing services via a limited company for those individuals who are not truly in business i.e. so-called ‘disguised employees’.
The October 2018 budget announced that the IR35 ‘off-payroll’ rules, introduced to the public sector in 2017, are to be extended to medium and large-sized businesses in the private sector from April 2020.
IR35 itself hasn’t changed. However, from 6 April 2020, the responsibility for determining if a contract is inside or outside of IR35 will shift from the contractor to the client, assuming they are a medium or large business.
Why are the changes happening?
HMRC maintains that many contractors continue to operate outside the rules, estimating that one in three contractors working through their own personal services company (PSC) should correctly be inside IR35. As a result, new ‘off-payroll’ rules were implemented in April 2017 for contractors working for public sector organisations.
Instead of contractors themselves being responsible for determining their IR35 status, this obligation has been handed to the engager of each contractor (i.e. the client or the client’s agent). Where a contractor is deemed to be ‘inside’ IR35, the fee-payer must deduct income tax and employee’s National Insurance contributions (NICs) from the contractor’s pay, as well as paying employers’ NICs. The Treasury expects this new measure to net £1.3 billion per year by 2023.
Extending the changes to the private sector was originally planned for April 2019. However, HMRC’s consultation process highlighted a number of challenges during the public sector rollout. The decision was, therefore, taken to delay until April 2020.
How will the off-payroll rules be implemented?
A ‘status determination statement’ which outlines the end client’s IR35 status decision must be provided to the contractor or the agent directly engaging the contractor.
Clients or agents must ensure that they make decisions based on each contract individually and avoid making blanket decisions. A contractor can ask a client for the reasons behind their decision in writing and challenge the decision if they believe it to be incorrect.
Where a contractor contests the determination, the engager must respond within 45 days stating the reason why they reached their decision or that they have changed the determination. If they fail to do this, the client will assume the IR35 liability.
What’s being done to assist in the process?
To help businesses in determining employment status with confidence, HMRC will publish updated guidance and provide industry-specific support. An improved version of the much-criticised check employment status for tax (CEST) tool has been promised following negative feedback from public sector users and tax tribunal rulings upholding decisions contrary to status outcomes given by CEST.
HMRC is also planning to publish suggestions to help contractors if they disagree with their client’s status decision, although it has no plans to be directly involved.
Exemptions will exist for small business users, based on a combination of annual turnover, balance sheet, and the number of employees.
Is it still possible to work outside of IR35?
HMRC recognises that at least two-thirds of engagements through personal service companies are correctly outside of IR35.
Taking into account the impact of the off-payroll rules in the public sector, despite some initial hiccups, many contractors continue to work outside of IR35; even HMRC continues to use contractors outside of IR35 for its internal projects.
Now is the time for contractors and clients to engage sooner rather than later to confirm any current or upcoming contract’s IR35 status in preparation for April 2020. The changes ultimately should provide for greater transparency and certainty in contracts.
