Is your business ready for upcoming changes to the IR35 “off-payroll working” tax rules?
The changes come into force for those operating in the private sector for any payments made to relevant contractors on or after 6 April 2020. This means that, depending on the payment date for a particular contract, the new rules could apply to work completed before this date.
The IR35 / “off-payroll working” rules apply to those who provide services to engagers (customers or clients) via a personal service company (PSC). They apply where, if the relationship had been a direct engagement between the individual contractor and the engager, it would have been one of employment for tax purposes. The rules operate to charge tax and National Insurance contributions (NICs) at broadly the same rate as that charged for employees. Historically, the IR35 tax charge has provided for a 5% deduction which recognises the costs of running a company. However, there is no such deduction under the new rules.
Currently, the responsibility for any tax arising under IR35 for a private sector contract will sit with the PSC, apart from in limited circumstances involving fraudulent behaviour by an engager.
6 APRIL 2020
With effect from 6 April 2020 the private sector rules will be aligned with the public sector. It will be the engager who will be responsible for assessing whether a contractual arrangement falls within or outside IR35; and, where the arrangement falls within IR35, operating PAYE on the fees before paying the net amount to the PSC. Where an agency is involved in the supply chain, the agency will be required to operate PAYE if it is are the fee payer.
At the outset, the rules will only apply to medium and large companies in the private sector, so small businesses will not be required to operate the new rules at this stage.
STATUS DETERMINATION STATEMENT
All medium and large companies engaging the services of a worker through a PSC will be required to undertake an IR35 status determination for every contractual arrangement where the payment for that service will be made on or after 6 April 2020. They must then notify this determination to the PSC by way of a status determination statement (SDS). The SDS must be prepared before the first pay date after the new rules come into force in order to ensure the correct tax treatment is applied. Where an agency is responsible for paying the PSC, the SDS must also be supplied to the agency.
The SDS is a vitally important document for an engager. If an incorrect determination is made, the tax liability resulting from the incorrect IR35 status will be assessed on the engager unless they can demonstrate that they have used “reasonable care” in preparing the SDS.
Once an SDS is served on the PSC, they must be given an opportunity to appeal the determination. The engager company is required to respond to any appeal request within 45 days and a failure to do so could again lead to the engager being assessed to any tax arising from an incorrect determination, even where the SDS has been prepared using reasonable care.
HMRC has a tool (the ‘check employment status test’ (CEST)) which can be used to help determine the status of a particular engagement. However the CEST test has been subject to a number of criticisms, particularly as the test fails properly to address mutuality of obligation, which is seen by the Tax Tribunal as one of the three key indicators of employment status. There have been a number of recent Tax Tribunal rulings that have made decisions which are contrary to the CEST determinations.
Any SDS is a determination in respect of tax only; this does not conclude a contractor’s or PSC’s status for employment law purposes.
HOW WE CAN HELP
Penningtons Manches Cooper can assist you with these new rules, by providing specific advice on your processes and contractual arrangements and supplying you with bespoke documentation to help you meet the legal requirements.
Our services include:
- Confirming whether you are a medium or large employer for the purposes of this legislation
- Reviewing the arrangements you have with contractors and where appropriate amending your documents
- Supplying you with appropriate documentation to assist you with the new requirements including: a briefing paper for board purposes explaining the legal and commercial risks involved in the new legislation; a template SDS; guidance on how to interpret differing contractual arrangements; and an appeal process
- Training for your managers on how to prepare appropriate SDSs
- Advising on employee relations issues which may arise
- Assisting with appeals
We are happy to offer the document package and training on a fixed-fee basis.