Are you paying your workers via personal service companies or agencies? You will need to operate new procedures from 6 April 2020 as HMRC bring in IR35 rules to the private sector.
How does it affect employees?
The new regime will affect you if you work via your own personal service company (PSC). If you are an off-payroll worker, you should be aware that your clients are likely to investigate the profile of their contractor workforce more closely than before. This will form as part of a general review of compliance, strategy and spend. But the changes could be felt more widely. Anyone supplying personal services via an ‘intermediary’ could be within the scope of the IR35 rules. An intermediary can be an individual, a partnership, an unincorporated association or a company.
The change could impact you if you supply personal services to large and medium organisations in the private and voluntary sector. If your client is a ‘small’ business, the rules are unchanged. A ‘small’ company meets two of the following criteria. Its annual turnover is not more than £10.2 million. It has not more than £5.1 million on its balance sheet. It has 50 or fewer employees. If you contract with an unincorporated organisation, the new rules only apply if its annual turnover is more than £10.2 million.
Significant tax implications arise. If IR35 applies, the business or agency paying you will calculate a ‘deemed payment’ based on the fees charged by your PSC. Broadly, this means you are taxed like an employee. You will receive payment after deduction of PAYE and employee National Insurance Contributions (NICs). If you operate via a PSC, the PSC will receive the net amount. You will then receive without further payment of PAYE or NICs. The potential tax advantages of working under such a contract – especially for PSCs – are much reduced.
This is a good time to take stock of your options. Are clients likely to query your employment status? Should you consider restructured work arrangements, or renegotiating fees? If working via a PSC, is it still the best business model? With clients checking that contracts comply with the new rules, employment status for contractors is likely to come under increasing scrutiny across the board.
How do the IR35 rules affect employers?
Under the new rules, responsibility for making the decision as to whether IR35 rules apply passes to the business who uses the service. The key question is whether, if the freelancer’s services were provided directly to that business, they would then be regarded as an employee. If you or your client use CEST, HMRC’s online employment status check tool, HMRC undertakes to stand by the results if the information provided is accurate, and given in good faith. At present, however, HMRC considers CEST is unable to determine status in 15% of cases, and many commentators consider the failure rate much higher. HMRC is working to improve CEST.
The business will have to give you the reasons for the status decision in a ‘Status Determination Statement’ (SDS). If your worker disagrees, they can challenge the status determination. You should respond within 45 days, either withdrawing or upholding the decision, again supplying reasons.
HMRC announced on Friday 7 February that the IR35 rules will only apply to payments made for contracts that apply after the 6 April 2020. Previously, the rules would have applied to any payments made on or after 6 April 2020, regardless of when the services were performed.
What does this mean? Organisations will only need to determine whether the rules apply for contracts they plan to continue beyond 6 April 2020. Find out more about these changes here.
Do you need help with the IR35 rules?
Keep up to date with the latest IR35 news here. We would be delighted to talk through your options and the tax consequences. Please get in touch with Ann Bibby on firstname.lastname@example.org or 01295 250401.