IR35 – Five Key Points on its Rule Changes as from April 2020

The HMRC set up IR35 some years ago as a way to determine if a worker is a ‘disguised’ employee. In other words, whether they are being paid ‘off-payroll’ through an intermediary rather than being an employee of the organisation. The intermediary could be the contractor’s own limited company, through which both the organisation and the worker gain – the organisation has no need to pay NI contributions or employee benefits, and the worker can take advantage of tax efficiencies through the limited company.

IR35 has had its issues as well as its critics over the years, and still does. Currently, there are different rules for public and private sector contracts. But from 6 April 2020, the rules will be the same for both. This means that all organisations will be responsible for determining their contractors’ IR35 status.

There are five key points that you need to be aware of as a business owner, director or CEO:

  1. Size of Organisation
  • If you are a medium or large Incorporated business, you will qualify if:
    • Your annual turnover is more than £10.2m
    • The balance sheet totals more than £5.1m
    • You have over 50 employees
  • For Unincorporated organisations and those organisations whose turnover exceeds £10.2m in one calendar year, you will need to operate under the new rules from the start of the following tax year. Unincorporated organisations will need to keep detailed records of turnover per calendar year, even if this differs from the period over which you draw up your accounts. Clearly, this will provide you with a further administrative burden.
  1. Provision of Information
  • Hirers, i.e. your organisation, must pass details of the employment status determination and the reasons for that decision down the contractual chain to each party. The chain could include an agency, the PSC (personal service company), and of course the workers themselves.
  • To do this effectively, put a procedure in place for making the employment status determinations and then passing the information on to the workers and fee-payers within the chain.
  • One particularly important point you must consider is dealing with any data privacy issues arising from this new process.
  1. Dealing with Non-Compliance
  • If the PSC or any other party in the labour supply chain fails to account for PAYE and NIC, you may find your business liable as you are the end user.
  • This appears to be an unfair burden on you, the hirer. We are awaiting guidance from the HMRC, which has been promised, on the circumstances when HMRC would not seek recovery from the end user.
  • HMRC has also promised guidance on how to ‘take reasonable care’, and how to implement a status disagreement process.
  1. Dealing with Disagreements
  • HMRC has rejected the suggestion that it should be involved in any resolutions, suggesting that the worker and hirer are best placed to assess the facts.
  • As the hirer, you will need to put in place a ‘status disagreement process’ and respond to representations from workers where there is a disagreement over determination.
  • You will be expected to respond to disagreements within 45 days.
  1. Lack of Confidence in CEST
  • The Check Employment Status for Tax tool (CEST) is intended to help with status determinations. However, CEST still fails to win the confidence of its intended users, particularly in light of HMRC’s failure to apply the status tests correctly in recent tax tribunal cases.
  • Keep in mind that relationships change over time and ways of working may change.
  • HMRC promises that a programme of education and a support package will be released.

In summary, although this change means some time will need to be spent on implementing new processes and then administering them, you should easily be able to comply with these conditions even if they don’t seem fair.

The items that may cause the biggest challenge are the storage and sharing of data, and dealing with any non-compliance and appeals. I hope that the guidance that the HMRC have promised is provided very soon.

Challenges to consider now before the new legislation comes into effect on 6 April 2020 are:

  • Does your business fall within the size requirements?
  • Identify those PSC’s providing services.
  • Make a determination of their status.
  • Notify status to PSC and/or the agency showing ‘reasonable care’. Don’t take a blanket approach and include everyone, ensuring that you properly check each individual’s status to make separate determinations for each worker.
  • Be prepared to deal with appeals.
  • If you decide that the contractor/worker is more akin to employment, instigate PAYE and NI for them.
  • Consider whether individuals might leave if they would rather not be treated as an employee.
  • Also consider whether individuals identified as employees may try to prove their rights as a worker for employment rights, possibly backdating any claim.

For further information on IR35 rules and how they affect your organisation, or if you have any other issues you need help with, do call me on 0118 940 3032 or click here to email me.