IR35 enters the private sector from 6th April 2020

Private SectorIn a not-unexpected move on Monday (29.10.18), the Chancellor announced that businesses in the private sector will become responsible for assessing an individual’s employment status, if the individual works through their own Limited Company, from 6th April 2020.  As many thought this change might be implemented in April 2019 that gives at least one years relief! The delay is probably largely thanks to Brexit uncertainty!.

The background to this is (you can see our previous IR35 post about the Public Sector here):

Since April 6th 2017, the IR35 status for Public Sector Contractors with Limited Companies has been determined by the client, not the contractor. The client has become liable if they make the wrong IR35 determination. This is because HMRC is convinced that a large proportion of contractors are “disguised employees”. This change, means the way which IR35 is enforced in the public sector, shifts the responsibility away from HMRC and onto the end client i.e. the public sector body.

The client therefore needs to assess the Contractors working practices and if they decide that IR35 applies, the contractors company will be taxed at source, exactly as if it were an employee (and employee and employer NIC’s need to be paid). However, the contractors’ employment status will not change, so they will not receive the rights and benefits that go with full ’employee’ employment (e.g. holiday pay, SSP, unfair dismissal rights etc).  To complicate this, there has already been a successful claim from an affected Contractor in the public sector for holiday pay, which you can read here.

The HRMC have provided a ‘Check employment status for tax’ (CEST) tool which is designed to test whether an engagement is inside or outside IR35, which you can see here – https://www.gov.uk/guidance/check-employment-status-for-tax

However, this CEST tool has been widely criticised in the Public Sector for asking incomplete questions and for giving ‘incorrect’ status decisions.

 

In the Government’s Budget Guidance of 29th October 2018, which you can see here, and which we’ve reproduced in full below, the Government says that “The reform will not apply to the smallest 1.5 million businesses”.  Which means that this will only apply to Contractors with large or medium sized clients.  So, if your business is classed as ‘medium or large’ this change will affect you, and when you employ someone who has their own limited Company, you will be responsible for determining if the Contractor can legitimately work for you as a Limited Company or must be taxed as an employee.

The debate has started about what ‘small’, ‘medium and large’ actually means:

  • The Guardian reported (here) that this would mean “private firms with more than 250 employees [would be] responsible for checking contractors’ status “.
  • However, other commentators have pointed that a “small” business has fewer than 50 employees and either turnover or assets of under €10 million.  But that definition is apparently from an EU Directive, so ….!
  • As yet the Government have given no guidance on which organisations will be affected.  However, their Budget Guidance (at point 10) says “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”.
  • Some commentators believe the ‘immunity’ for small businesses may only be temporary (so it will apply to all private businesses in the future).

What seems clear at the moment is:

  • Contractors will, from April 2020, have to know how big their client is (number of employees or turnover/assets) when deciding whether to accept a contract with them, as that may determine their tax status.
  • Contractors will be concerned that medium/large sized organisations may be overcautious and avoid any risks and ‘blanket’ all Contractors as ’employees’ (as happened widely in the public sector).
  • Medium and Large Companies will incur costs in the planning and work involved in identifying all their Contractors, potentially face a shrinking talent pool and reduced flexibility, and possible later legal challenges from Contractors.
  • The government estimate that private sector IR35 reform should raise more than £3billion in tax between 2020 and 2024.

Bodies representing Contractors have generally reacted with anger to this Budget news (although not surprise!).  The Government previously consulted on this reform (which closed in August 2018) and in their response to the Consultation they did acknowledge that the HMRC needs to improve its CEST tool (see information here) so it is effective in the private sector.  Let’s wait and see how that goes!!!

We’ll update this post and our affected Clients as more news comes in!


(The full text of the Budget Statement)

Budget 2018

Increasing compliance with the off-payroll working rules in the private sector (“IR35”)

  • To increase compliance with the existing off-payroll working rules (known as IR35) in the private sector, businesses will become responsible for assessing an individual’s employment status. The reform does not apply to the self-employed or introduce a new tax. It brings the private sector in line with the public sector.
  • The government has listened to stakeholder views during the consultation. The reform will not apply to the smallest 1.5 million businesses, and large and medium businesses will have longer to adjust, with the changes being introduced in April 2020.

1. It is fair that two individuals working in the same way pay broadly the same income tax and National Insurance contributions (NICs), even if one of them works through a company. The off-payroll working rules were introduced in 2000 and require that individuals who work like employees, but through companies, pay similar taxes to other employees.

2. Contractors who do not comply with the rules pay significantly less income tax and NICs than an equivalent employee. HMRC estimates the cost of non-compliance to the exchequer will reach £1.3 billion a year by 2023-24.

3. The reform will bring the private sector in line with the public sector, where evidence suggests compliance has improved since the reform was introduced in 2017. HMRC estimates the reform has raised £550 million in income tax and NICs in its first year.

4. The off-payroll working rules only affect people working like employees and through a company. They do not apply to the self-employed.

What does the reform mean for businesses?

5. 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.

6. 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.

7. The government has listened to business and will build on learnings from the introduction of the reform to the public sector. As a result:

• 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.

8. 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.

Responding to the consultation

9. Since the introduction of the public sector reform, and during the consultation, the government has listened to the views of stakeholders. On that basis, it can confirm:

• 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

• the government has monitored the public sector reform, including by engaging with the sector during consultation and evidence shows that compliance is increasing without impacting market flexibility. The government will continue to monitor tax receipts as data becomes available.

Next steps

10. 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.

 

 

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