26th February 2020
The government is proposing changes to the IR35 legislation within the private sector.
At present, where a business engages an individual via an intermediary, normally a personal service or ‘one-man’ company (PSC), then the PAYE and Class 1 National Insurance compliance obligations rests with the service company.
The Government, through HMRC, has expressed considerable concern over the years about the lack of revenue the IR35 legislation was collecting. The first steps to rectify the ineffectiveness of the IR35 legislation started in April 2017 and saw changes within the public sector (as defined by the Freedom of Information Act 2000). The draft legislation has now been published by the government and will come into effect from 6 April 2020.
A summary of the proposed changes includes:
- The rules will replicate those which already apply to the public sector
- The business, as the engager will be responsible for operating the legislation which will apply where the services are provided via an intermediary, typically the worker’s Personal Service Company (PSC) but would otherwise be considered an employee of the business.
- Where the PSC is supplied via an agency, or agency supply chain, the agency closest to the worker in the supply chain will be responsible for operating PAYE and Class 1 National Insurance on the fees paid.
- Workers will no longer be able to claim the 5% deduction for general costs.
- Where the business is deemed to be small the intermediary will retain responsibility for operating the legislation.
- For businesses which operate through an incorporated business, the Companies Act definitions test will need to be considered to see whether the legislation will apply (see comments below).
- Where the business is an unincorporated business only the annual turnover test will apply, but it will need to be considered on an annual basis, rather than the two-year test which will apply to incorporated businesses.
- For both incorporated and unincorporated business, where they cease to be regarded as small, the legislation will need to be operated from the beginning of the next tax year.
The test for incorporated businesses details
Where two of the following conditions are met during two consecutive accounting periods, the incorporated business will need to operate the off-payroll worker legislation:
Balance sheet total £5.1m
Number of employees 50 or more
Where a business is caught by the legislation, any payments it makes to intermediaries will need to be considered as part of the Apprenticeship Levy calculation.
If based upon the above tests a business is small and you engage with off-payroll workers, then the responsibility to consider the IR35 legislation will stay with the PSC.
Where the legislation is due to apply on payments made to an off-payroll worker the business must:
- Provide the worker and any agency in the supply-chain with details of their decision as to whether the legislation will apply.
- The decision which determines whether the worker would be a direct employee of the engager were it not for the presence of the intermediary must be provided with 31 days.
Right of appeal
The draft legislation makes provision for a right of appeal against the decision.
The business must respond within 45 days setting out the reasons why they believe the legislation is applicable or provide confirmation that they have changed their mind and the worker is not caught by the legislation.
The legislation does not provide the right of appeal to HMRC and it will be a matter for the two parties to resolve. However, HMRC will be issuing guidance to help resolve disputes, which at the time of writing is still awaited.
Transfer of debt
Where there is a failure by any intermediaries within the labour supply chain to operate PAYE and Class 1 National Insurance, the legislation provides HMRC with powers to recover any unpaid liabilities from, typically, the first intermediary in the supply-chain. The Government has stated that the powers are only to be applied in cases of deliberate default or where the arrangement is part of a structured tax avoidance scheme.
What should businesses be doing now?
Businesses should be reviewing their existing worker supplier-chain, reviewing the contractual arrangements in place to see whether the proposed IR35 legislation will apply.
Failure to fully consider the implications of the draft could result in the business facing significant liabilities, not only tax and National Insurance but also interest and penalties.
The Government has launched a review of the IR35 legislation
The Government announced on 8 January 2020 a review into the implementation of the IR35 legislation which is due to come into effect from 6 April 2020 for medium and large businesses.
The review will not delay the introduction of the legislation and the Government has stated that it (the review) will determine if any further steps can be taken to ensure the smooth and successful implementation of the reforms.