From April 2020, certain private sector firms will have to check whether their contractors are caught by the latest version of the ‘IR35’ rules.

Background – what is IR35?

The IR35 rules were introduced in 2000 to combat the perceived exploitation of the tax system, whereby workers were being paid via their personal service companies instead of having tax and National Insurance (NI) deducted at source via PAYE.

It was up to the contractor to determine whether the rules applied. If applicable, the rules required contractors to operate PAYE on the income received by their personal service company as if it was income received in a personal capacity.

However, many contractors simply ignored the IR35 rules altogether and so from April 2017 the rules were modified for those working with public sector bodies. The public sector body now had to deduct tax and NI at source from the amounts paid to the contractor company if it determined that the rules applied.

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IR35 for the private sector

From April 2020 this new approach will be extended to ‘medium and large’ private sector firms. They will now be required to determine whether they need to deduct tax and NI when paying contractors.

Importantly, those classed as a small business will not be required to implement the new off-payroll working rules.

A ‘small’ business is one which satisfies two of the following conditions:

  • An annual turnover of less than £10.2m.
  • A balance sheet total of less than £5.1m. Fewer than 50 employees.
When do the rules apply?

The aim of the off-payroll working rules is to ensure that, where an individual would have been an employee if they were providing their services directly, they pay broadly the same tax and NI as an employee.

Over the years a number of tests and considerations have been developed via case law which are used to determine whether an individual is employed or self-employed. These same tests are applied to determine a contractor’s status for off-payroll working purposes.

They include:

  • What is the client’s business?
  • Is there any form of contract?
  • Is the contractor at financial risk in the project?
  • Is the contractor working exclusively only for one client?
  • Does the contractor work with their own materials / equipment on site? Does the contractor have to rectify work at their own expense?
  • Can he or she provide substitutes to carry out the work in place of themselves?
  • Is the contractor “part and parcel” of the client’s organisation?
  • The intention of the parties?
  • The length of the contract?
  • Terms of contract – e.g. does the contractor have a notice period, the hours of work, where and how is the work carried out?
  • Is the contractor prevented from working for other clients?
  • The pay structure e.g. holiday pay. Is the worker paid by the job / project or a fixed wage at a fixed time (as an employee would be)?
  • Are any benefits provided similar to those offered to employees (company car/van, sick pay, bonuses etc.)?
  • Has any Government Department (including the Revenue/Contributions Agency) ever provided a written status ruling in the past?

HMRC provide an online tool, CEST, www.gov.uk/ guidance/check-employment-status-for-tax which can be used to determine whether a worker should be classed as employed or self-employed for tax purposes.

Next steps for engagers
  • Establish whether they meet the definition of a ‘small’ business. If they do then there is no further action to be taken.
  • Assess the status of the contractors working for them on a case by case basis to determine whether the off-payroll working rules apply.
  • Issue a Status Determination Statement (SDS) notifying the worker of the decision reached.
Next steps for contractors
  • Consider whether the rules are likely to apply and how this will affect the overall tax liability.
  • Review the terms of contracts and, if caught by the off-payroll working rules, determine how this affects business strategy and fee structure for the future.
  • Upon receipt of an SDS, there is the option to challenge the decision. The engager then has 45 days to confirm its finding, giving reasons, or withdraw and replace the SDS with a revised decision.
  • If the nature of a contract results in the application of the new off-payroll working legislation early advice should be sought so that the additional tax burden is identified at the earliest opportunity.

This is a complex area of tax law and the effects can be significant for both engagers and contractors.