IR35 – the outcome of the Government Review
IR35 is the name for rules governing the taxation of payments to off-payroll workers providing services through certain intermediaries, such as a personal services company (PSC). The rules aim to ensure that, where those services are more akin to employment than self-employment, payments are subject to pay-as-you-earn tax (PAYE) and National Insurance Contributions (NIC).
Draft legislation, published in 2019, set out significant changes to the way IR35 applies from April 2020, moving responsibility for determining whether PAYE/NIC should apply from the PSC to the engager (the Client) and for deducting the PAYE/NIC to the party paying the PSC (the Fee Payer). The new rules will apply to all medium and large private sector clients, as well as the public sector.
These new rules have been met with concern from contractors who may suffer cash flow implications and reductions in contract payments to offset additional cost to Clients. Clients and other parties in the supply chain will be required to operate onerous procedures in order to avoid incorrect treatment with associated penalties. The business paying the PSC will also suffer new costs, including employer’s NIC and apprenticeship levy payments on contractor payments.
Consequently, the government commenced a review of IR35.
Results of the review into IR35
In February, the government concluded its review. As many expected, the rules are still being implemented from 6 April 2020, despite a great deal of pressure for deferral. The resulting small changes aim to help smooth the introduction of IR35.
Prior to the publication of the response to the review on 27 February 2020, the government had already announced some of its content, including the change ensuring that the rules only apply to payments for work done on or after 6 April 2020, rather than just payments made from this date. Therefore, Clients will not need to consider IR35 for any projects completed before 6 April 2020.
The headline announcements contained in the review are focused on communication with businesses and compliance with the rules. These are that:
- HMRC will ramp up its communications efforts, including webinars and guides, to support contractors’ understanding of the rules
- businesses will not have to pay penalties for inaccuracies in the first year, except in cases of deliberate non-compliance.
Both these announcements have been welcomed by those affected by the new rules.
However, there are two more detailed changes that have been made, one of which is only contained in HMRC’s IR35 guidance in updates also released on 27 February 2020.
Request for the size of a client
If a worker or other party in the contractual chain is not sure whether their client is ‘small’ or not, they can request confirmation from the client. The client will have 45 days(confirmed in the revised guidance) from the date of receiving the request to confirm its size. However, HMRC have distanced themselves from this process by making clear that, if the client does not respond to the request, the requestor can apply to the courts for an order to require the client to do so.
Overseas clients
In contrast to the previous understanding, the new rules will not apply to engaging businesses who have no UK connection (not a UK resident or have a UK permanent establishment). In these circumstances, the worker’s intermediary must consider whether the IR35 rules apply, as they should currently be doing now. It is important to note, however, that overseas companies will still need to be included in calculations when determining whether a client is categorised as ‘medium’ or ‘large’.
Action to take now
We can expect mention of IR35 in the upcoming Budget, but it seems unlikely that Chancellor Rishi Sunak will make any notable changes to the draft rules other than to include the changes announced following the IR35 review.
Therefore, if you are a ‘medium’ or ‘large’ private sector business or in the public sector and you engage off-payroll workers then, if you have not already done so, you should consider the following actions.
- Check whether your worker provides their services through a personal services intermediary. If so, proceed with the following steps.
- Check where you are in the labour supply chain (are you the client or fee payer, or both, or are you the PSC or the worker)?
- If you are the client, check the employment status of your workers for tax purposes. If the relationship is one of employment, proceed as set out below.
- Send a status determination statement to parties in the labour chain.
- If you are the fee payer, calculate the amount on which PAYE/NIC and apprenticeship levy are to be based on and pay any amounts due to HMRC.
- Respond to disputes within 45 days.
For further help, refer to HMRC guidance or seek specialist advice from your employment tax advisor.
The author is Caroline Harwood, Partner and Head of Share Plans and Employment Tax at national audit, tax, advisory and risk firm, Crowe.
