Government confirms detail of private sector IR35 reforms
From 6 April 2020, the Government is changing how the IR35 rules apply in the private sector. From that date, many hirers who engage workers through a personal service company will be responsible for determining the worker’s employment status for tax purposes. Where the new rules apply, the person who pays the contractor’s company (the “fee payer”) will have to take on responsibility for deducting income tax and National Insurance Contributions (NICs) and will have to pay employer NICs to HMRC. Parties in the labour supply chain will have to share information and liability for non-compliance may transfer to others in the chain.
Following a consultation which ended in May 2019, the Government has published its consultation response and a draft Finance Bill containing the detail of how the new rules will work.
Who do the changes affect?
The new rules affect large and medium-sized companies and large and medium-sized unincorporated organisations in the private sector.
Small companies (including small LLPs) and small unincorporated organisations are not affected.
A company is a small company if it meets at least two of the following conditions
- Annual turnover not more than £10.2 million
- Balance sheet total not more than £5.1 million
- No more than 50 employees
However, if a company is part of a group of companies, it will only be a small company if the parent company also qualifies as a small company. When looking at turnover, the turnover of any connected persons also counts.
An unincorporated organisation, such as a partnership, is a small organisation if its turnover in a calendar year is not more than £10.2 million.
The hirer will have to provide its status determination and reasons for it directly to the worker. It will also have to provide this information to the party it contracts with and each party will have to cascade this down the labour supply chain until it reaches the fee payer.
Dealing with non-compliance
A party that fails to comply with its information obligations could be liable for unpaid tax and NICs. So if the hirer does not carry out a status determination or does not provide the determination and reasons as required, the hirer will be liable for unpaid tax and NICs until they comply.
If the hirer carries out the assessment but another party in the chain fails to pass it on, that party will be liable. However, if HMRC is unable to recover from that party, it will be able to seek to recover from the first agency in the chain and ultimately the hirer. HMRC plans to publish guidance which will clarify the circumstances in which it will not seek unpaid liabilities from parties further up the labour supply chain.
Disagreements over status determination
Hirers will have to take reasonable care when making status determinations. In the event of disagreement over the determination, workers and fee payers will be able to make representations to the hirer. The hirer will have to respond within 45 days, with reasons. If it fails to do so, it will be liable for the tax and NICs. The Government will provide supporting guidance on the dispute process.
CEST and guidance
The Government notes criticisms of CEST, HMRC’s “check employment status for tax tool”, and has been working on enhancements which it will test on stakeholders. It will roll out the enhanced version before it introduces the reforms. It will also provide more support and guidance this summer.
What about the public sector and small private sector hirers?
Similar rules are already in force for hirers in the public sector. The Government will be making some changes to the public sector rules so that the rules in the public and private sector are the same.
Current private sector rules will continue to apply where a contractor engages with a small company or organisation though a personal service company. In that situation, the personal service company remains responsible for making the employment status determination and for paying tax and NICs.
How we can help
We can provide you with complimentary guidance to help you understand how to use CEST properly and answer CEST accurately. We also offer a fixed-cost due diligence tool to help you investigate your contractor arrangements, and accompanying practical guidance on how to use it. Therefore, with our help, you should have the information, resources and written records you need to complete the CEST questionnaire so that you can rely on the result it provides.
We can also provide a comprehensive overview of your contracts, resourcing practices and processes in light of your IR35 position, to help you understand what changes (if any) you may need to make to your business when it comes to engaging staff and contractors.
Finally, with our experience and connections we can provide end-to-end viable and sustainable solutions to your resourcing needs.
The articles published on this website, current at the date of publication, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your own circumstances should always be sought separately before taking any action.