IR35 – tax changes afoot to off-payroll working arrangements
These changes are aimed at the private sector and follow on from the IR35 reforms already implemented in respect of public sector organisations.
The Government is currently consulting on the proposed new rules and, as with the IR35 public sector reforms, the changes will affect individuals who provide their services via their own personal service companies (PSCs) or other intermediaries such as partnerships or LLPs. Businesses that engage workers through such PSCs and other intermediaries (such as labour agencies) will also be affected by the new proposals.
In summary, the new rules will require the private sector organisation (as the end client), to assess if the IR35 rules apply to the contracts they enter into with any PSCs, whether hired directly or via third parties. If IR35 applies, the private sector client fee payer will be required to apply PAYE and NIC deductions to the payment for the worker services ie the individual worker is treated as a deemed employee for tax purposes. In addition, the fee payer must also account for employer’s NIC and, potentially, the Apprenticeship Levy.
This is a fundamental change to the IR35 rules applying to the private sector as under the existing regime, any employment tax due under the IR35 rules is payable by the PSC/intermediary and not the private sector end client. Further, as has been seen with the IR35 reforms made in the public sector, there is also the risk that some private sector end clients will automatically deduct tax from payments made to the PSC in order to manage their own tax compliance risks.
Whilst we await the outcome of the consultation and the detailed legislation, the consultation does confirm that 'small' private sector businesses will be exempt from the new rules. Currently, 'small' for these purposes is that as defined in the Companies Act 2006. The consultation also proposes a requirement on the client to provide the worker (and other parties in the labour supply chain), with the result of the IR35 review and, where requested, the reasons behind the decision. Alongside this, there is also a proposal for the end client to be required to have a dispute process for workers to be able to raise any concerns over the IR35 decision and to have their comments taken into account. Thus, public sector bodies will also need to consider the new rules in the context of information sharing and potentially introducing a dispute resolution process.
The consultation also addresses the tax compliance behaviour of the parties within a labour supply chain with a suggestion of a legal requirement for those parties in the chain to complete their respective obligations. If they fail to be compliant, the proposal is that they would become liable for the tax and NICs until such time as their obligations are met.
What does this mean for you?
Ahead of the implementation of the new rules, private sector businesses, staff agencies and those contractors who provide their services via PSCs should be considering the impact of the changes.
- Consider making representations in the Government consultation, which closes on 28 May 2019. The Government consultation document is available here
- For those businesses engaging off-payroll workers via PSCs, undertake a review of your business to assess your contractor populations and the scale of any impact of the changes. This may involve developing a process for assessing whether in the context of a relationship with a PSC, the individual would have deemed employment status for tax purposes.
- Review your contracts to ensure they are fit for purpose in time for the new rules, for example, including provisions pursuant to which contractors confirm their tax compliance and that contractors are provided with the necessary determinations.
- Remain aware of the commercial sensitivities of operating PAYE. For individual contractors, there may be cash flow management issues where tax is deducted at source. There may also be requests for employment rights to accompany employee tax status.
- Ensuring that processes are in place and implemented to ensure that the business and PSC complies with their respective obligations under the legislation and within the required timeframes.
Both the contracts in place, and the reality of the situation, will be relevant to whether a particular arrangement is caught by the new IR35 changes.
How can we help?
We can help you prepare for the new rules with training on IR35 and employment status. We are working with clients to help identify risk areas and review consultancy and agency agreements to ensure that they are protected.
This article is taken from Private Wealth newsletter - May 2019