Off payroll working for the private sector
What is IR35?
The ‘IR35’ rules are designed to prevent the avoidance of tax and national insurance contributions (NICs) through the use of personal service companies (PSCs) and partnerships. The rules have been in situ since April 2017 for PSCs who provide their services to the public sector.
From 6 April 2020*, new tax rules are proposed for individuals who provide their personal services via an ‘intermediary’ to medium or large private businesses** (the ‘fee-paying business’ for the purpose of this article). An intermediary may be another individual, a partnership, an unincorporated association or a company. The most common structure is a worker providing their services via their own company (PSC) which is the term used in this article to summarise the rules which will apply to all intermediaries.
What will the effect of IR35 for the private sector mean to me?
If determined that the rules apply to you, this will mean:
- the fee paying business will calculate a ‘deemed payment’ based on the fees the PSC has charged for the services of the individual
- generally, the entity that pays the PSC for the services must first deduct PAYE and employee National Insurance contributions (NICs) as if the deemed payment is a salary paid to an employee
- the fee paying business will have to pay to HMRC not only the PAYE and NICs deducted from the deemed payment but also employer NICs on the deemed payment
- the net amount received by the PSC can be passed onto the individual without paying any further PAYE and NICs.
The practical effect of these rules is that you will no longer benefit from the potential tax advantages of receiving such income via your own company.
The businesses to whom your PSC provides a service may look to renegotiate their contracts with you due to their increased cost of employer NICs.
The new tax rules apply to amounts paid from 6 April 2020 and so may affect current contracts.
Who will decide if the IR35 rules apply?
The onus will be on the fee paying business to form an opinion as to whether, if the personal services of the individual were provided under a contract directly between the individual and themselves, the individual would be regarded as an employee of the business. This is the same kind of employment status test based on case law that businesses and agencies have to consider when they hire staff directly.
HMRC has a Check Employment Status Service tool (CEST) to help businesses decide the status of individuals providing personal services to them, although HMRC is currently working ‘to identify improvements to CEST and wider guidance to ensure it meets the needs of the private sector’. HMRC state that the current tool is ‘able to determine employment status in 85% of cases’, which also means it is not correct in 15% of cases. Many commentators consider the accuracy of the tool to be much lower.
For reasons which are explained below, the business may be tempted to make a finding of ‘employment’, particularly if CEST indicates employment.
The Employment Status Service tool can be accessed at www.gov.uk/guidance/check-employment-status-for-tax.
Why have these rules been introduced?
The 2020 rules will replicate many of the effects of the ‘intermediaries’ legislation enacted many years ago (often called the IR35 rules). This legislation requires, for example, a one person company to judge whether the IR35 rules apply. If IR35 applies the PSC would then treat the relevant fees received by the company as deemed payments to the worker and thus account for PAYE and NICs.
In the past, PSCs have made the decision as to whether they fall within the definition of off-payroll worker or not, with many viewing the risk of being ‘caught’ by IR35, worth taking given that the benefits of company profits being paid out under a ‘low salary, balance as dividends’ regime
far outweighs the burden of paying PAYE and NICs. The new legislation however shifts the responsibility to the business receiving the services of the individual. This means that the risk of non-compliance falls onto the business. If the business decides the new rules do not apply, they face the possibility of a protracted dispute with HMRC. If the Tribunal decides against the business, the business will have to pay over PAYE and NICs to HMRC, having already paid the gross fees to the PSC.
What can you do if you disagree with the business deducting PAYE and NICs?
The government will require the medium or large business when it makes a status determination to:
- communicate the decision to the worker in a Status Determination Statement (SDS), and
- give the reasons for that determination if requested by the worker.
If you disagree with the decision you can use the tool to see if you obtain a different conclusion. If you obtain a result which confirms self-employment you can discuss the results with the business or you can contact us to discuss the matter. Even if you obtain an employment result, this does not necessarily mean the result is correct.
The government will introduce a process whereby PSCs can make a representation to the fee paying business where you believe that the conclusion mentioned in the SDS is incorrect, with time thereafter for the fee paying business to respond.
What is the tax effect on you?
The important point to appreciate is that you will be treated in tax terms as an employee of the business that pays the PSC for your services. So if a contract ends during the 2020/21 tax year, the paying entity should send you a P45 showing the total deemed payment and deductions for PAYE and NICs. If the contract extends over the 2020/21 tax year, the paying entity should issue a P60 to you showing the total payment and deductions in the 2020/21 tax year.
You will need to show the amounts on the P45 or P60 as an employment on the employment pages of your 2020/21 self assessment tax return.
The other important point to appreciate is that it is your company which is receiving the amounts from the paying entity. How can you extract such income tax efficiently? The draft legislation has special rules to allow you to do so.
What procedures does your PSC need to follow if deemed payments are received?
The PSC will deduct the amount of the payment it receives, as well as the PAYE/employee NICs costs incurred, from its taxable income, so it will not be taxed twice.
What if your company has other contracts hiring out your personal services?
Nothing is expected to change in respect of contracts your company has with “small” private sector clients. The possible application of IR35 needs to be considered but there is no change in the law regarding IR35.
How we can help
We can help you decide whether to discuss the operation of the proposed legislation with the medium or large business.
If you have any queries, please do not hesitate to contact Tim Adcock.
*As these reforms could dramatically increase costs for both private sector businesses and personal service companies, we wanted to raise awareness of the potential changes and the extent of the impact. However please note, whilst the new “off payroll” rules for the private sector are due to come into force on 6 April 2020, this is subject to the passing of the Finance Act 2019 at the Autumn 2019 fiscal event, the date of which has yet to be finalised. Information is provided as a guide only and this article should not be relied upon without having taken our more in-depth advice beforehand.
**What is a medium or large business?
The government intends to use an existing statutory definition with the Companies Act of a ‘small company’ to exempt small businesses from the new rules. Therefore the rules will exempt businesses meeting any two of these criteria: a turnover of £10.2 million or less; having £5.1 million on the balance sheet or less; having 50 or fewer employees. If the business receiving the work of the individual is not a company, it is only the turnover test that will apply.