SINCE 1999, there have been efforts to crack down on a form of perceived tax avoidance by individuals using personal service companies (PSCs) to avoid paying employee income tax and National Insurance Contributions (NICs).
The name IR35 comes from the 35th Inland Revenue (now HMRC) news release following a statement by the Chancellor in the 1999 budget which announced that measures would be implemented to crack down on these arrangements. It came into effect in April 2000 and is now commonly the name given to the ‘Intermediaries Legislation’.
However, the Treasury has taken the view that despite the IR35 legislation, tax avoidance is widespread and to combat this, in 2017 the ‘off payroll working rules’ were implemented for the public sector. It is now proposed that in April 2020, these rules will be extended to medium and large companies in the private sector. Draft legislation has been published and it is expected that the legislation will be included in the 2020 Finance Bill.
What is set to change?
Currently, the obligation is on the PSCs to assess whether or not the individual would have been a deemed employee of the end-user client had it not been for the PSC. Going forward, it is proposed the obligation to determine the employment status of the individual will rest with the end-user client if they are a medium or large company. This is a major shift of responsibility.
The end-user will be required to carry out what is called a Status Determination (SD) and thereafter, notify their contracting party and the worker of that SD. If the SD is that the individual would be a deemed employee, the final party in the chain before the PSC must operate payroll, make deductions for income tax and employee’s national insurance contributions and pay employer's national insurance contributions on the fees paid for the services.
On a practical level, what should be considered?
When the legislation comes into effect, it will apply to payments made on or after April 6, 2020.
- The first step for companies is to carry out a review of their workforce. The contracts between the parties are likely to be insufficient to provide for the new rules and in particular, provisions in relation to obligations, liabilities and indemnities are likely to require revision.
- There will be an increased administrative burden and costs throughout the supply chain. For example, reviews will require to be carried out regularly (at the very least at the end of every tax year however, it is likely more frequent reviews will be necessary).
- There will be additional costs of operating payroll for PSCs and of course the time and expense of dealing with challenges to SDs which will invariably happen.
- It should also be noted that services provided in March (or perhaps even earlier) are likely to have to be paid under the new rules.
IR35 has always been considered to be complex, what is clear is that professional advice should be sought as it will be very important to be prepared for the changes.