IR35 Private Sector Changes Coming
One of the announcements in the recent Autumn Budget concerns the legislation commonly referred to as IR35. Changes coming in April 2020 will impact those medium/large businesses who engage consultants or contractors via intermediaries. Businesses affected by these changes need to plan well in advance of April 2020.
IR35 is tax legislation dealing with Income Tax and National Insurance. Its purpose is to make sure that consultants/contractors who are working as employees within a business, do not avoid PAYE tax liabilities by providing their work via an intermediary.
It has been up to each individual consultant/contractor and their intermediary companies to decide whether IR35 applies and whether they should be paying PAYE Tax and National Insurance. Unsurprisingly, the answer is generally no and those contractors/consultants have instead been able to source their income through more tax efficient ways, particularly declaring dividends through their own personal service companies.
In April 2017, the obligation to apply IR35 (therefore to decide whether PAYE should be applied) changed in the public sector, and in the recent Autumn Budget it was announced these changes will now be rolled out to the private sector.
For those engaged in the public sector, checks and systems should already be in place. HMRC has audited several public authorities to check that they are compliant following April 2017.
Those private sector businesses that use off payroll consultants/contractors should start to take steps soon to ensure that their business, processes and IT systems are ready for compliance from April 2020.
What does this mean for businesses?
• From 6 April 2020, medium and large businesses will need to decide whether the rules apply to an engagement with individuals who work through their own company.
• Where it is determined that the rules do apply, the business, agency, or third party paying the worker’s company will need to deduct income tax and employee NICs and pay employer NICs.
• Medium and large businesses will have until April 2020 to implement the changes.
• The existing rules will continue to apply to the 1.5 million smallest businesses.
• HMRC has developed the Check Employment Status for Tax (CEST) service to help businesses determine whether the off-payroll working rules apply. HMRC will continue to work with stakeholders to improve further CEST and guidance before the reform comes into effect.
• The reform is not retrospective – as it has in the public sector HMRC will focus its efforts on ensuring businesses comply with the reform rather than focusing on historic cases.
• HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time following the reform and businesses’ decisions about whether their workers are within the rules will not automatically trigger an enquiry into earlier years.
• The reform will not stop anyone working through a company if that suits them, and does not apply to the self-employed.
• HMRC will provide extensive support and guidance to help businesses implement the offpayroll working rules to ensure they apply them correctly, and will ensure the guidance is appropriate to the needs of the private sector, which are more diverse than those of the public sector.
• HMRC continues to work with stakeholders to identify improvements to CEST and wider guidance to ensure it meets the needs of the private sector – enhancements will be tested with stakeholders, operational and legal experts before the reform is implemented.
A further consultation on the detailed operation of the reform will be published in the coming months. This consultation will inform the draft Finance Bill legislation, which is expected to be published in Summer 2019.