Businesses must prepare for upcoming changes to the off-payroll working rules. Coming in April 2020, private-sector firms using personal service company (PSC) contractors will take legal responsibility for ensuring off-payroll contractors stick to the tax rules known as ‘IR35’, but with an exemption aimed at the smallest 1,500,000 businesses in the UK.
The effect of the rule change will be that if you or your agency are paying a worker through a company, you will need to deduct income tax and employee NICs and pay employer NICs from those payments, effectively making you, for tax purposes, the ‘employer’.
Affected businesses and organisations in the private and charity sectors will need to check whether contractors, freelancers, or any worker considered self-employed need to pay income tax and national insurance.
The Treasury believes a third of people claiming self-employed status as a PSC are actually effectively employees of their clients and should pay more in national insurance contributions, as if they were directly employed.
The government reformed the IR35 rules for the public sector in April 2017, and it was widely expected that eventually the private sector would follow. Following a consultation, the new regulations are now set to come into law.
Businesses engaging contractors covered by the new rules also have to carry liability should HM Revenue & Customs decide an incorrect assessment has been made.
However, the welcome news is the rules are NOT retrospective, so there is time to look at your arrangements. The rules do not prevent people working through service companies, and they do not affect employment status for the purpose of employment rights, so you won’t have a situation where someone can argue that they have become an ‘employee’ simply because they are paid in compliance with the new rules.
However, whether you do engage someone directly or through a PSC, there may be issues around employment status anyway.
Who do the new rules apply to?
Only organisations not considered “small” by the Companies Act 2006 will be subject to the new off-payroll working rules. A small company must meet two of the following qualifying conditions:
An annual turnover not more than £10.2m
A balance sheet total not more than £5.1m
No more than 50 employees.
If the organisation engaging the PSC is considered ‘small’, then the PSC themselves will continue to be responsible for assessing whether IR35 applies to them, which has been the practice in the private sector to date.
How can my organisation prepare?
The Government offers this advice to prepare for the rule changes:
Look at your current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through PSCs.
Determine if the off-payroll rules apply for any contracts that will extend beyond April 2020. You can use HMRC’s Check Employment Status for Taxservice to do this.
Start talking to your contractors about whether the off-payroll rules apply to their role.
Put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.