Background
IR35 rules (off payroll working rules) are designed to ensure fairness between individuals working in a similar way, so those who work like an employee but through their own limited company pay roughly the same income tax and national insurance contributions as other employees. These rules don't apply to those working as self employed.
In April 2017 reforms were made in the public sector so that the public body rather than the worker of the PSC would be responsible for determining if the off payroll rules apply. If the off-payroll rules applied (caught by IR35) then the public authority or fee payer (i.e. agency) that paid the PSC became responsible for deducting and paying the PAYE/NI across to HMRC.
HMRC viewed the public sector reforms as a success, increasing compliance with the off payroll working rules and although disappointing its not a surprise that HMRC are going ahead rolling reforms into the private sector with effect from 6th April 2020.
What are the new rules?
Small Businesses
If you work for a client who is classed as a small business as defined in the Companies Act 2006 the new rules won't apply. A company is classed as a small if in a company year it meets two of the following:
- Annual Turnover - Less thane £10.2 million
- Balance sheet total - Less than £5.1 million
- Number of employees - employees not more than 50
It's worth keeping in mind that if the small company is a subsidiary of a large/medium-sized parent company, it'll need to follow the new rules.
If your client meets the definition of a small business, this doesn't mean you can forget about IR35! The current rules will be in place where the PSC will continue to be responsible for determining the IR35 status of each contract and deducting any tax and national insurance.
The 5% allowance will continue to be available for PSCs working for smaller organisations but will be removed for anyone under the new rules working for medium/larger organisations.
Medium to Large Organisations
Where a contractor works through their own PSC for a medium or large-sized client in the private sector the private sector organisation will now be responsible for determining if the off payroll rules apply and if they do, ensuring the correct income tax and national insurance is paid.
The client will need to complete a status determination with the aim of helping ensure contractors are assessed on an individual basis, avoiding the blanket decisions which were seen in some areas of the public sector.
HMRC have said there will be a client led disagreement process introduced where a contractor can appeal if they disagree with the decision. Clients will be required to share the reasoning on decisions to other parties (agency and contractor) within 45 days. Whilst this isn't the independent review process many would have hoped for, it is an improvement from the non-existent appeals process with the public sector reforms.
One of the repeated concerns raised from the consultation was in regards to the CEST tool and whether it is fit for purpose. HMRC say the enhanced tool will be available later in 2019. The original tool was released only a few months before the public sector changes came into effect, so hopefully, the tool is released well before April 2020.
Impact?
The private sector reforms are targeted at individuals who are not compliant with the current rules. 'Those who are already complying with existing rules should feel little impact' but HMRC expect that the changes will impact 170,000 individuals working through PSCs who would be engaged as employees currently if working directly for the client as well as up to 60,000 organisations that use workers who work via PSC and 20,000 agencies providing workers to medium/large sized organisations.
HMRC are estimating that there will be ongoing savings for 230,000 PSCs not having to make the determination or 'accounting burdens'
What can I do?
Communication is key - the new rules will be effective for contracts entered into or for payments made on or after 6th April 2020. It's extremely unlikely that these rules will be scrapped now, so it's best to brace for them and be prepared.
HMRC have said they won't be carrying out targeted campaigns for people who were previously outside IR35 and are now paying taxes under IR35
- Start talking with your client now, find out their plans. If you're signing an extension which takes you past April 2020 or a new contract, you'll want to know what processes the client has in place and how it'll impact you.
- Have your current contract reviewed by an IR35 specialist and assess your working practices to make sure you know where this sits with IR35.
- Work through HMRC’s online CEST tool and see what result this gives you
For more information: https://www.gov.uk/government/publications/rules-for-off-payroll-working-from-april-2020/rules-for-off-payroll-working-from-april-2020
