Are you ready for the changes to off-payroll working in the private sector?
Changes to the IR35 rules for large and medium-sized companies are due to be introduced from 6 April 2020, writes John Kahn, senior associate, Birketts LLP.
The IR35 rules were introduced during the 90s. The government of the time was concerned that many individuals who claimed that they were self-employed were in actual fact employed (for tax law purposes), but were disguising their employment by providing their services through a personal services company.
To counter such tax avoidance, the IR35 rules (until April 2020) worked by deeming the personal services company to be the employer of the individual contractor in such cases.
The personal services company was deemed to be the employer and required to operate PAYE in any case in which the individual would have been regarded as an employee of the client had the services been provided directly by the individual to the client (as opposed to via a personal services company).
The potential tax liability, in most situations, lay with the personal services company, with the result that many companies felt comfortable entering into arrangements with contractors via personal services companies. From 6 April 2020, however, the Government plans to change the IR35 rules as they apply to large and medium-sized companies.
The changes will shift the responsibility for determining whether an individual is employed or self-employed for tax purposes, as well as the liability to operate payroll, from the intermediary (e.g. a personal services company) to the fee-payer that pays the intermediary (which will often be the client).
As an example, take the case of a large private company that has a contract for services with a personal services company to supply the services of an individual consultant.
At present, the responsibility to decide whether the relationship is one of employment or genuine self-employment for tax purposes currently lies with the personal services company.
The liability to operate PAYE, deducting, withholding and paying over the income tax and National Insurance Contributions (NIC) due on the deemed employment also currently lies with the personal services company.
Therefore many large companies have been happy to engage contractors via their personal services companies, because the risk and potential liability lay in most cases with the personal services companies, not with the company that engaged the contractor.
Going forward, (from April 2020), it will be the company (if it counts as a large or medium-sized business for the purposes of the rules, as to which see below) that will have to determine the employment status (for tax law purposes) of any off-payroll workers they engage and, if the IR35 rules apply, they will need to operate PAYE and pay NIC.
These new private-sector rules mirror similar changes that have already been introduced to cover off-payroll working in the public sector, but which are still widely misunderstood.
Note that small businesses are excluded from the changes to the rules. The Government says it expects that 95 per cent of arrangements will not be affected by the reforms, since 95 per cent of the fee-payers, (that is, the end client companies engaging personnel through personal services companies) will count as small and will therefore be outside the scope of the new rules.
A company counts as small if it meets at least two of the following three criteria:-
- Its annual turnover must not be more than £10.2 million
- Its balance sheet total must not be more than £5.1m
- Its average number of employees must not be more than 50.
There are anti-avoidance provisions to ensure that the test takes into account joint venture and group arrangements, as well as connected persons, so that companies cannot artificially split in order to qualify as small.
For further information or advice, or if you are interested in finding out more on the rules on working through intermediaries or personal services companies, Birketts employment and tax specialists are available to assist. Please contact John Kahn on 01603 756520 or drop him an email: john-kahn [at] birketts.co.uk