If your business has people working there who provide their services to you through the intermediary of a company which they own, then you’re likely to be familiar with the original IR35 legislation, which has been in force since April 2000.
IR35 was introduced to tackle a particular form of perceived tax avoidance where individuals may seek to avoid paying employee income tax and national insurance contributions by supplying their services to a business which then pays them through an intermediary company (known as a personal service company – PSC). The intermediary company is owned by the individual and the intermediary company then pays the individual in share dividends rather than paying them wages, with the income tax payable on dividends being less than would be payable on salary.
IR35 requires the intermediary company to assess whether the individual is really providing his or her services to the end user as an employee of the end user and if the answer to that is yes, then the intermediary is required to regard the payments it makes to the individual as wages and make deductions for income tax and national insurance accordingly.
With effect from 6 April 2020, the IR35 tax legislation will be changing. Medium and large companies in the private sector that contract with PSC’s for the provision of workers' services will have to account for income tax and national insurance through PAYE as if the worker were directly employed. This will bring those medium and large companies in line with what the public sector has already been required to do since April 2017 through the ‘off-payroll working rules’.
The effect of the new laws is that the burden of making the determination of employment status falls on medium and large end-user clients rather than on the PSC. The end user will then need to notify the PSC and the worker of that status determination. If the determination is that the worker is employed by the end user, then the end user will have to make deductions for income tax and employee national insurance contributions from the payments it makes to the PSC and will also have to pay employer national insurance contributions on those payments. In short, the responsibility for determining whether the off-payroll working rules apply will move to the organisation receiving an individual’s services (that is the end user), rather than the responsibility lying with the PSC.
Who does it apply to?
From 6 April 2020, medium and large private sector organisations will need to decide whether the rules apply to an engagement with an individual who does work for that private sector organisation through the individual’s own company.
The rules will apply to all private sector organisations that meet two or more of the following conditions:
- they have an annual turnover of more than £10.2 million
- they have a balance sheet total of more than £5.1 million, or
- they have more than 50 employees
A simplified test also applies to some end users and considers annual turnover. They must apply the rules if they have an annual turnover of more than £10.2 million and are not:
- a company
- a limited liability partnership
- an unregistered company, or
- an overseas company
There are also rules which cover connected and associated companies. If the parent of a group is medium or large, their subsidiaries will also have to apply the off-payroll working rules.
HMRC has developed the Check Employment Status for Tax (CEST) service to help organisations determine whether the new rules apply.
What do “end user clients” need to do?
If the new off-payroll working rules apply to the end user client (because they fall within the definition of medium or large), they will need to assess the employment status of a worker and will be responsible for issuing a Status Determination Statement (SDS). This must be done for every contract agreed with an intermediary company or worker.
The end user client will need to:
- provide the SDS and the reasons for the determination to the worker and the intermediary the end user is contracting with (and this must be done whether the determination shows that the off-payroll working rules apply or not)
- make sure they keep detailed records of SDS’s, including the reasons for the determination and fees paid
- have processes in place to deal with any disagreements that arise from the SDS, and
- if the off-payroll working rules apply, the end user will need to deduct income tax and national insurance contributions and pay those deducted amounts to HMRC
End user clients must show that they have taken reasonable care when making an SDS determination about the employment status of a worker. This means:
- taking independent legal advice, and
- making a full assessment on an individual basis and giving a clear reasoning for the assessment there can be no rubber-stamping or blanket decision making.
What to do if a worker disagrees with the SDS
If the worker or PSC disagrees with the end user client’s SDS determination, they will need to write to the end user explaining why.
The end user will then have 45 days from the date of receiving the worker’s disagreement to respond. During that time, the end user should continue to apply the rules in line with their original determination.
The Government will be introducing a statutory, status disagreement process to allow individuals to challenge SDS determinations.
Until March 2020, PSC’s (that is, the intermediary companies) will still be responsible for making the employment status determination. However, it’s important for PSC’s and end users clients to take steps now to analyse existing assignments through reviews of each contract and working practices in readiness for April 2020.