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The aim of the IR35 ruling is to prevent tax-avoidance ensuring that contractors pay the same amount of tax and National Insurance Contributions (NIC) than an equivalent employee.
The government has announced that changes to this legislation will be implemented on the 6th April 2020, bringing the IR35 ruling for the private sector in line with the public sector.
Under the new changes, full responsibility for determining a contractor’s IR35 status will lie with the end-client, and no longer with the contractor. The end-client must conclude whether a contract is inside or outside of the IR35 rules and, if inside, the ‘fee payer’ becomes responsible for paying all related tax and NIC to HMRC.
To date, reviews of IR35 have left organisations feeling frustrated and concerned over this shift of responsibility. We’ll explain what the review means to you, how to avoid non-compliance and provide you with advice on how to prepare.
The IR35 reform
The draft legislation for the Finance Bill 2019-20, published by the government on the 11th July 2019, introduced the intended changes to the IR35, often referred to as ‘off-payroll working’.
The government has announced two reviews so far this year, the first on the 7th January with a further change announced on the 7th February, in an attempt to appease businesses by giving them more time to prepare.
February’s review stated that the new rules will only apply to payments made for services provided on or after the rollout date regardless of when the work was carried out.
However, the content of the reviews has unsettled many businesses who hope that the government will reconsider their plans.
With no signs that the government will reverse their proposals or delay implementation it makes sound business sense to prepare for the new ruling, details of which will be confirmed in March’s Budget.
Who will be affected by the changes?
The changes impact recruitment agencies and all large and medium sized private sector businesses who use contractors through the contractor’s own Personal Services Company or partnership (PSC).
A PSC refers to a limited company set up to provide the services of a single contractor (usually the sole shareholder and company director).
In instances when your organisation uses the services of a sole trader, or a contractor who is not tax resident in the UK and supplies services wholly outside the UK, these rulings will not apply.
Small business exemption
As the changes only effect large and medium sized organisations, smaller businesses are out of scope.
You are classed as a small business if you meet at least two of these scenarios in line with the Companies Act 2006:
It is prudent for small business owners to check the features of the Companies Act 2006 during periods of growth and if their status changes then the new rules must be adhered to.
In instances where status does change, the guidance given on the Gov.Uk website must be followed which currently states, “you must apply these rules from the start of the tax year following the end of the calendar year when you met the conditions.”
The Status Determination Statement (SDS)
An SDS must be provided to the contractor and the PSC from the end-client confirming their IR35 status before any payments are made. If an agency is responsible for paying the contractor/PSC they are deemed as the ‘fee payer’ and, as such, must receive a copy of the SDS too.
Reasonable care must be made when determining whether a contractor is indeed freelance or whether it is more accurate to say that they are on an open-ended contract. HMRC sees the latter scenario as abusing the tax system.
To show that reasonable care has been carried out during the assessment process, reasons for the outcome must be provided.
Organisations who fail to provide reasonable care when making an assessment may:
Help with the assessment
To determine what the contractor’s status for tax purposes would be if employed directly by the end client, without going through their PSC, you should consider a number of factors:
As no clear guidance has been given on how often an assessment should take place, we would recommend repeating these assessments once a year to remain compliant.
Check Employment Status for Tax (CEST)
This government online tool has recently been improved by the government in readiness for April’s changes. Although many organisations still criticise the accuracy of the CEST, it does provide guidance to work out the employment status of an individual and HMRC guarantee to stand by its results provided that the data entered is accurate.
How to prepare for the changes
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If you require HR support or advice on this complex topic, please get in touch with our team of HR professionals on 0161 941 2426.
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