The UK’s IR35 legislation ensures that contractors pay the same tax and National Insurance contributions as an equivalent employee. New changes will be implemented in April 2020 to increase compliance by transferring more responsibility to large and medium companies to administer IR35.
This brief plain-English guide explains the changes, how you might be affected, and what Taylor Hopkinson are doing to handle the transition.
What is IR35?
IR35 aims to address the group of contractors who
(a) operate through an intermediary company, typically a personal service company (PSC) which is a limited company that they own, and
(b) would otherwise be classed as employees in the absence of the intermediary. For example, working permanently and full-time for a single client.
A contractor operating through a Limited company but otherwise practically operating as an employee is considered to be a “disguised employee”.
The crux is in the way payments are disbursed in different working arrangements. A salary paid directly to an employee is subject to tax and National Insurance Contributions (NIC) which are handled by the employer under PAYE. In a PSC, the worker receives payments as dividends, which are exempt from NIC. IR35 aims to prevent disguised employees from using this working arrangement to avoid NIC.
Why the changes to IR35?
Since 2000, contractors have been responsible for self-assessing their IR35 status and National Insurance Contributions. This arrangement has been ineffective and the HMRC estimates that, under current rules, the cost of non-compliance in the private sector would escalate to £1.3bn by 2023/24.
What are the changes to IR35?
The new IR35 legislation to be introduced in April 2020 shifts responsibility for assessing IR35 obligations from the contractor or PSC to the end user.
Where the end user concludes that IR35 applies, the fee payer (which may be the end user themselves, a recruitment agency, or other third party paying the intermediary) will be responsible for accounting for and paying the related tax and NIC to HMRC, including the additional cost of Employer’s NIC.
Proposed changes aim to reduce the cost of non-compliance and make it easier for HMRC to monitor and enforce compliance in the future.
Who will be impacted by the new IR35 rules?
The new rules will apply to
(a) medium and large businesses in the private sector that are the end user of the worker’s services,
(b) to the fee-payer, if different, such as fee-payers in the recruitment sector, and
(c) contractors providing services to medium and large businesses, and
Where the end user is a small company, the PSC will continue to be responsible for assessing whether IR25 applies. The Companies Act 2006 to defines a small business as a business with two or more of the following features:
- turnover of £10.2m or less
- a balance sheet total of £5.1m or less
- 50 employees or fewer
It remains unclear, but for small businesses, we expect that the fee payer, such as the recruitment business, will not have any additional obligations other than the existing requirement to submit a quarterly intermediaries’ return to HMRC, with details of workers placed with clients where they do not operate PAYE.
How will the proposed IR35 change impact recruitment/service sector businesses and their clients?
Medium and large businesses in the private sector will need to determine whether the IR35 rules apply to an engagement and formally notify the ultimate fee payer, such as a recruitment business or agency that pays the worker’s intermediary.
Where IR35 applies, the fee-payer must apply PAYE withholding and incur additional costs, such as employer’s NIC (currently 13.8 per cent) and the Apprenticeship Levy (0.5 per cent) where appropriate.
Companies may need to implement additional processes and resources for IR35 compliance and associated PAYE/NIC withholding obligations.
What is next for IR35?
The government has announced that further detailed consultation on the proposals will be published in early 2019, followed by draft legislation.
What are Taylor Hopkinson doing now to prepare for the change to IR35?
We continue to work with clients and contractors to maintain compliance and transparency throughout this transition…
- We are familiar with the Governments ‘Good Work Plan’ from December 2018 and are following closely for further announcements in 2019.
- We are gathering information by attending seminars and open sessions, awaiting further news from the Government consultation process, as well as from internal research, and through legal advisors.
- We have formed an internal working group across Finance, Operations, Contracts, Compliance and Senior Management, and meet regularly to review strategy. We understand the large amount of work that may be required across these functions to prepare for the change.
- We are assessing current client arrangements for the workers we supply who operate via ‘off-payroll’ arrangements, such as PSCs, who could be impacted by these rules.
- We are working with clients to establish whether they are likely to be outside the new rules by virtue of being a small business.
- We are communicating and explaining the changes and implications to the workers who operate via intermediaries such as PSCs.
- We are assessing the direct and indirect financial impact of the proposed changes. For example, where arrangements are affected, the client will provide a determination.
- Where Taylor Hopkinson operates as the fee payer, we shall account for and pay the related tax and NIC, including the additional cost of employer NIC.
- We are maintaining an open dialogue and sharing knowledge with our clients to ensure a proactive and educated response as the changes unfold.