IR35 – changes to the off-payroll working rules

This legal update was originally published on 10 October 2019 and has been updated following the Government’s decision to delay the changes until 2021. On 17 March 2020, the Government announced that these measures will be delayed by a year, to 6 April 2021.

IR35 is a term used to describe two sets of tax legislation which were designed to assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax.

The aim of the rules has been, rather unsurprisingly perhaps, to combat tax avoidance by workers, and the organisations hiring them. It is designed to catch those who are supplying their services to clients via an intermediary, such as a limited company, but who would otherwise be an employee if the intermediary was not used.

Contractors who work through their limited company enjoy a level of tax efficiency. While they don’t get employee benefits (like holiday and sick pay), they have flexibility and control over their work. This has made it an attractive option for some.

If caught by IR35, they have to pay income tax and National Insurance Contributions (NICs) as if they were employed. The financial impact of IR35 is significant. It can reduce the worker’s net income by up to 25%, costing the typical limited company contractor thousands of pounds in additional income tax and NICs.

What is happening with IR35?

In April 2017, the Government replaced the original IR35 legislation with the new off-payroll tax, which was initially introduced in the public sector. This change meant that the end user (sometimes called the ‘hirer’) is responsible for working out whether the contractor falls inside or outside of IR35. If they fall inside, the hirer, agency or other third party who pays the contractor then needs to deduct tax and NICs and report them to HMRC.

So from 2017, public sector bodies have been under the obligation of establishing the employment status of the service provider and, where appropriate, pay the PAYE and National Insurance Contributions for them.

Medium-large private companies

From April 2020, the rules are changing for medium-large sized private companies too. From this point on the rules relating to medium-large private companies will mirror those which already apply to public sector bodies.

The obligation to pay tax is being shifted from the intermediary to the hirer. They will be responsible for determining the employment status of the service provider, deciding whether the off-payroll rules should apply and deducting PAYE and National Insurance where appropriate (on top of the fees that they were already required to pay for the service itself).

Hirers may wish to rely on HMRC’s Check Employment Status Tool (CEST) when determining the employment status of an individual providing a service. This is not compulsory but HMRC will respect the result of the tool unless it appears the result has been obtained fraudulently.

It should be noted that where the hirer defaults on the payment of tax, HMRC has the power to shift liability along the line to the intermediary.

Small businesses

At least two of the following must apply:

• annual turnover is not more than £10.2m
• the balance sheet is not more than £5.1m
• the number of employees is not more than 50.

From April 2020 the position will remain as before for small businesses, with the 
obligation to determine and pay tax remaining with the intermediary.

Likely practical impact

As end users will now be responsible for these additional tax payments on top of the fee agreed with the intermediary, it is likely that end users will be looking to terminate existing contracts and enter into new contracts which reflect these increased costs by reducing the level of payment to the service provider.

Alternatively, workers may be encouraged to abandon their use of intermediary companies and opt to be employed directly by the end user instead.

What you can do to prepare?

Look at your current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through personal service companies. This may be of particular relevance to those driving for the company.

It may be that you decide you need to hire contractors on fixed term employment contracts if that is a better reflection of the reality of the employment relationship.

You should also make sure that someone in your company has responsibility for determining the employment status of those individuals providing services through an intermediary and deciding if the regulations will apply.

Start talking to your contractors about whether the off-payroll rules apply to their role.

If you do decide that the regulations don’t apply, make sure you can evidence why and consider providing a scheme for dealing with disputes where an individual refutes their employment status determination.

The content of this article is from the October 2019 edition of Deliver and is for general information only. To download the latest issue, please visit the newsletter section of our website. If you would like to discuss any of the matters raised above in more detail, please contact Sonya O’Reilly or a member of our Employment team. Law covered as at October 2019.