IR35 – What you need to know about the off-payroll working rules

In April 2020 the new changes come into place for individuals who provide personal services via an intermediary for medium-sized and large businesses.

The aim of the IR35 legislation is to prevent individuals from reducing income tax and National Insurance Contributions through what HMRC consider as ‘disguised employment’, where an individual provides their services through a personal service company (PSC such as a limited company) and receives payment in the form of low salary and dividend income.

The IR35 rules will operate a two parallel system dependent on whether the end client of the contract worker is:

  • A small private sector organisation
  • A medium or large organisation in the private sector

Engaging with a small private sector organisation

Where contractors are engaged with a small business, there are no changes and responsibility for IR35 compliance will remain with the PSC.

Engaging with a medium or large organisation

Where contractors are engaged with a large or medium organisation, responsibility will move over to be with the large or medium organisation.

This was previously brought in for the public sector in April 2017 and saw a lot of contractors having to make the choice between becoming employed via the payroll or looking for new roles, some even moved away from the public sector.

This shift in responsibility moves the decision of deciding whether the rules apply away from the individual’s PSC, to the organisation that is the end-user of the worker’s service. Responsibility for deducting the associated employment taxes and National Insurance contributions will rest with the Final Payer making the payments to the PSC.

How does this affect contractors?

If you are a contractor you may find that the organisation you engage with may look to put you on the payroll, this will have many disadvantages (including tax!) and you will need to weigh your current status versus becoming employed.

You should review your current situation and see whether you fall inside or outside IR35. When reviewing this deemed employment status you should consider, at least the following:

  • Mutuality of obligation: is the end-user obliged to offer work and, if so, is the worker obliged to do it?
  • Does the worker have the right of substitution or is obliged to perform services themselves
  • The level of supervision, direction or control the end-user is able to exercise over the worker when carrying out their duties
  • The level of integration into the end-users business (whether the worker is in effect treated as though they were an employee).

How does this affect medium or large businesses?

If you are a large or medium business, from 6th April 2020 you will be responsible for deciding the employment status of workers, you will then need to communicate this to the person/organisation you work with.

It’s important you keep records of your employment status determination, including reasons and fees paid.

You must have a process in place for dealing with any disagreements from your contractors and respond to these in 45 days failure to do so will result in the worker’s tax and National Insurance contributions becoming your responsibility.

At Thompson Wright, we offer employment status health checks to review your current workforce, we recommend that you carry this out before April to get prepared.

 How can we help?

At Thompson Wright, we have numerous contractors that we act for and have a wealth of experience in assisting with contractors in the public sector who went through this change in April 2017. Our expertise includes:

  • We offer contract reviews which build in the reality of the situation and if you are caught under IR35 we can make recommendations for change.
  • Given our experience, we are also able to help you prepare and negotiate for conversations with the end client.
  • We can also assess the possible financial implications of a change in status.
  • If you are a medium or large company we can review your current workforce and ensure you are not caught by employment tax issues or IR35

If you are a contractor and are unsure of your current position and how the changes affect you, or indeed would like some advice, please contact Dan Oakes or Cat Hancock on 01782 613141.

Posted in Business Regulation, Latest News, Tax.