Extension_ to_ PAYE_ obligations_ for_ companies_ employing_ contractors_ (IR35_ rules)_ from_ April_ 2020
What’s the key issue?
If you’re a large or medium-sized company you may need to apply PAYE and NIC to payments made to your contractors (even if they provide services through a company) who are effectively providing employment services. These new rules (IR35) come into effect from April 2020.
These new obligations mark a significant change for both engaging companies and contractors themselves.
The background behind the changes
If you’re not familiar with these rules then here’s some background…
Self-employed versus employed status
Generally, tax is lower for self-employed persons than employees for the following reasons:
• Employers NIC is not paid by the person using the services – currently, 13.8% of earnings above a de minimus threshold are subject to Employers NIC.
• Employees NIC is slightly more expensive than classes 2/4 NIC and would cost a worker approximately £1,000 per year.
• The worker tends to find it easier to deduct expenses for a business than as an employee because the rules are slightly stricter for the latter.
There are a number of non-tax advantages and disadvantages to employment status, but for a number of well-paid service providers and service users, there can be a mutual preference to be self-employed.
This has always been a concern for the tax authorities and where they consider a person engaged as a consultant to be a de facto employee, they will assess the arrangement as if the consultant were an employee for tax purposes.
There is significant case law on this where the courts have examined the factors indicating employment versus self-employment. We will not comment further here for the sake of brevity.
Intermediaries legislation (IR35)
To counter the use of personal service companies to avoid certain workers being classed as employees, the government introduced the intermediary’s legislation, which is now found in Chapter 8, Part 2, ITEPA 2003.
The provisions apply where:-
• A person (the worker) provides services to a company or business (the client) via an intermediary (e.g. a personal service company)
• The worker does not receive employment income from the intermediary but may instead receive dividends; AND
• BUT for the use of the intermediary, the services provided by the worker to the client would normally have been treated as in the nature of employment for tax purposes.
In this circumstance, the personal service company is effectively ignored for tax purposes and a PAYE/NIC obligation arises on most of the income generated by the personal service company.
The obligation to apply the rules and pay PAYE/NIC currently falls on the Intermediary; NOT the end client.
Pressure to change – new rules for public sector organisations from 6 April 2017
Despite the introduction of the IR35 rules in 2000, HMRC feel that compliance with the current rules is low. This is put down to the fact that the obligation to apply IR35 applies to the service company rather than the end-user.
As such in 2017, the government changed the rules for public sector organisations (notably including the BBC) and instead imposed the obligation to apply PAYE/NIC in an IR35 case on the client or user of the personal service company NOT the personal service company.
This has caused a number of practical difficulties, BUT the result has been in HMRC’s view greater compliance. For example, more tax has been collected because the organisations using personal service companies have been quicker to apply IR35 and less willing to risk getting things wrong.
So what are the current proposals
The new rules for public sector employees appear to be here to stay and to ensure private sector companies don’t have an unfair advantage, the government has announced that the reform to the IR35 rules will be extended to the private sector from 6 April 2020.
The proposals summarised below are based on the latest draft legislation published by the Treasury, but would be subject to enactment in next year’s Finance Act.
• The April 2020 reform will mean that large and medium-sized companies engaging contractors through service companies (“the Clients”) will be required to make a determination of a worker’s employment status (even if those services are provided through a company) and communicate that determination to the “worker”.
• If they determine that a worker is an employee rather than self-employed, the client needs to communicate this to any Intermediaries involved in the provision of that workers services. The obligation to withhold PAYE/NIC falls either on the Client or in some cases agencies paying the Intermediary.
• Tax relief is available for companies subject to IR35 on the amount of the deemed employment payment and any secondary NICs due on it.
Determining self-employed status
This is the biggest challenge under the rules, as it’s a complex issue.
The government have introduced an online tool (Check Employment Status for Tax or CEST) test to help companies determine self-employed status.
The government have confirmed that they will stand by its findings if it finds that a worker is self-employed and therefore outside of the IR35 provisions.
However predictably the tool is very conservative in favour of a worker being classed as an employee. Therefore, if it gives a self-employed result, reliance can be placed but it often gives an unclear result or a determination of employment status in situations where one might normally consider a worker to be self-employed.
The worker has little control over the assessment process and how certain questions are answered can have a major effect on the outcome.
The government have promised to overhaul the CEST test to make it more fit for purpose.
Exemption for small companies
The government has decided that the smallest organisations will not be affected by the reform and will not need to determine the status of the off-payroll workers they engage.
A company qualifies as small in a year in which it satisfies two or more of the following requirements —
• Annual Turnover Not more than £10.2 million
• Balance sheet total Not more than £5.1 million
• Number of employees Not more than 50
What this means, for now, is that the obligation to apply IR35 in these cases stays with the personal service company.
Once further details are published we shall provide you with an update and we would be happy to discuss how this may affect you or your company.
What you need to do before April 2020
Should you be providing services that you feel may be affected by these changes, please feel free to get in contact with us.
We can analyse if the rules apply. In particular we can go through the current CEST test to see if you are considered to be providing services in the nature of employment OR if any of your contractors might be affected by the new rules.
It would be best to undertake this exercise now to avoid nasty surprises after April 2020 or conflicts between contractors and end clients which might be resolvable now.
If you have any queries, please feel free to call 020 7383 3200.
You may also be interested in our Tax Planning services.