What is IR35 and what is changing?
It has always been the responsibility of any company engaging an individual directly to determine the employment status of that individual. Where an employment relationship is deemed to exist for tax purposes, the individual must be paid through the company’s payroll to ensure appropriate deductions are made for tax and NIC.
As well as a direct engagement, a company will often engage a worker through an intermediary. This will sometimes be the worker’s own personal service company (PSC) but is also often an agency. Currently, in the private sector, the director / shareholder of a PSC is responsible for determining the employment status of the worker concerned (often himself) and operating the rules of IR35 to make appropriate payments of deemed PAYE and NIC to HMRC if necessary.
As of 6th April 2020, new legislation means that all medium and large-sized private sector companies will bear the responsibility of determining whether an individual working through a PSC is working for them in a relationship akin to that of an employee. Where the worker is engaged through an agency it will still be the end user private company’s responsibility to establish whether there is ultimately a PSC involved and if so to make the determination.
The private company has a duty to determine the status of the worker and to communicate this status to the worker and to the entity the company is contracting with. That entity then has to pass the determination to the next person in the labour supply chain until this reaches the fee-paying company who has to make the deductions of PAYE and NIC and account for these to HMRC.
Who is affected?
There is an exception for small companies. A private sector company is medium or large if it meets two or more of the following conditions:
- The company has an annual turnover of more than £10.2 million
- The company has a gross asset value of more than £5.1 million
- The company has more than 50 employees
If a company is part of a group, the size of the entirety of the group (worldwide if relevant) will need to be considered.
Grandfathering rules mean that the accounting period in which a company first meets these thresholds may have an impact on when the IR35 rules will start to apply for that company. In general, however, they will apply in respect of any services provided to the company after 6 April 2020.
What do affected companies have to do?
Those companies who fall under the new IR35 rules must decide the employment status of their workers; this must be done for every contract agreed with an individual through his/ her PSC or with an agency who is itself engaging through the worker’s PSC. These companies should:
- Pass their determination and reasons for determination to the worker and person/organisation they contract with
- Keep detailed records of these determinations
- Have processes in place to deal with any disagreements arising from the determination
- If the company is also the fee-payer and the IR35 rules apply, it must also deduct and pay tax, national insurance and apprenticeship levy contributions to HMRC. This includes employer national insurance contributions
These companies must take reasonable care when determining the employment status of a worker, and reasons must be given with the determination. Until these companies pass on their determination to the worker, agency, or other organisations they contract with, they will hold the liability to deduct tax and national insurance contributions.
Who is the fee payer if I engage an individual through an agency?
The determination as described above should be passed down the chain of contracts until it reaches the party directly above the worker’s intermediary. This party is known as the fee-payer or deemed employer.
If a party in a labour supply chain receives the employment status, but does not pass it on, they will become:
- The fee-payer
- Responsible for deducting the tax and national insurance contributions and paying these to HMRC
If you, as the fee-payer, do not receive a determination from the client or agent immediately above you in the labour supply chain, you should pass on the payment without deducting tax or national insurance.
How do I determine an individual’s employment status?
HMRC have put in place a CEST (Check employment status for tax) questionnaire that can be of assistance in determining an individual’s employment status. HMRC will stand by the determination provided the questions are answered accurately. However, this tool has come under repeated criticism and after various amendments by HMRC is now providing many ‘indeterminate’ results.
In the considerations of status, HMRC have stated that a review of the contract is not sufficient. The actual working practices of the relationship will matter more than the contractual arrangement.
The following are some dynamics of a working relationship that may be relevant to the status of the worker:
- Substitution and personal service
- Mutuality of obligation
- Financial risk
- Control and direction
- Part and parcel or integration into the client’s organisation
- Intention to have an independent relationship
Is the legislation really going to change this April?
Despite major speculation, lobbying and on-going protests around the change in legislation, HMRC are re-iterating that the change will happen in April, following their current review and fine tuning of the draft legislation and guidelines. HMRC are already issuing letters to those companies who they believe may be affected by the change.
If you are a user of contractors, an agency or a contractor and require assistance with any planning or preparation with regards to these changes, please don’t hesitate to contact us.