The introduction of new off-payroll rules will affect millions of employees across the UK and will place new duties on employers to recognise the employment statement of workers and pay their tax and national insurance costs, where previously they may not have been required to.
To help businesses make sense of this upcoming change, our team have produced this guide to try and answer some of the common questions about IR35.
What is IR35?
The off-payroll working rules, more commonly referred to as IR35, were created to ensure that those contractors who work as employees pay broadly the same employment taxes as employees, regardless of the structure they work through.
The rule applies to individuals (workers) who provide their service through an intermediary (such as a company, partnership or other unincorporated business) to another person or organisation.
Under the rules, it is the requirement of a business using the services of a contractor or worker to decide whether or not the worker would have been regarded for income tax and national insurance contributions (NICs) purposes as an employee if they were employed directly.
Already in use in the public sector since April 2017, the new rules have courted a large amount of controversy, particularly among high-profile TV stars and executives, who previously enjoyed lower tax and national insurance costs as a result of their off-payroll arrangements.
However, in the 2018 Budget, the Government confirmed that it would extend the reform to the off-payroll working rules to engagements in the private sector from April 2020.
The April 2020 reform will use the off-payroll working rules in the public sector as a starting point. This means that clients will be required to determine each worker’s employment status and communicate that determination to the worker via a determination statement.
In addition, the fee-payer (usually the organisation paying the worker) will need to make deductions for income tax and NICs and pay any employer NICs.
The Government has made it clear that those people who are genuinely self-employed should not be affected by this change.
What is the small business exemption?
Smaller organisations will not have to determine the employment status of the off-payroll workers they engage.
This includes unincorporated businesses with two or more of the qualifying conditions:
- Turnover not more than £10.2 million
- Balance sheet total not more than £5.1 million
- Number of employees not more than 50
Who is liable for tax?
If HMRC does not receive the tax due, the government is proposing that the liability should initially rest with the party that has failed to fulfil its obligations.
If HMRC is unable to collect the outstanding liability from the defaulting party the liability will transfer back to the first party or agency in the chain. If HMRC could not collect from them, it would then default back to the client.
Will employee rights be affected?
Statutory payments and other employment rights will not initially be affected by the proposed reforms. This means that the deemed employment relationship for tax purposes will not result in employment rights or statutory payment obligations for the deemed employer or fee-payer.
However, the government has stated they are committed to reducing the differences between the tax and rights framework for employment status and will bring forward detailed proposals for a new framework in due course.
Can an employer’s decision be challenged?
The legislation will introduce a client-led disagreement process. This should give contractors an opportunity to overturn what they view as inaccurate determinations, by allowing them to request the reason for a determination.
The end client will then have 45 days to respond and must provide reasons for the original determination.
The end client will also be required to either confirm or change its decision. If they fail to respond then they will then become the fee-payer, meaning that all liability will transfer to them.
How can I prepare?
Organisations affected by the reforms should take the following actions now to prepare:
- Identify and review their current engagements with intermediaries, including personal service companies and agencies that supply labour to them.
- Review current arrangements for the use of contingent labour, particularly within the organisation functions that are more likely to engage off-payroll workers.
- Put in place comprehensive, joined-up processes to get consistent decisions about the employment status of the people they engage.
- Review internal systems to see if they need to make any changes.
- A questionnaire is available for your use at https://www.gov.uk/guidance/check-employment-status-for-tax