What are the changes to the IR35 rules in 2020?
Clear Bridge HR • July 31, 2019
There’s been lots of talk about the upcoming changes to IR35 rules which, from 6 April 2020, will mean that private sector businesses will become responsible for assessing the employment status of the off-payroll contractors they engage (i.e. anybody not being paid via the normal payroll channel).
Medium and large businesses in the private sector that contract with intermediaries for the provision of an individual’s services will have to account for tax and national insurance through PAYE if the underlying relationship between the end user and the individual would be one of employment. However, the reforms will not impact the smallest businesses. This means that where a company satisfies two or more of the following requirements they will be deemed as a small business and be outside the scope of this reform:
- an annual turnover of not more than £10.2 million
- a balance sheet total of not more than £5.1 million
- no more than 50 employees
What is IR35?
IR35 was first introduced in 2000, and is designed to reduce tax avoidance by contractors whom HMRC believe to be ‘disguised employees’. This means people who work in a similar way to full-time employees but bill for their services via their limited companies (ultimately to make their business as tax efficient as possible).
What do the new rules mean?
In essence, the new rules will require an end user client to determine the employment status of an individual supplied via an intermediary. They will then have to communicate this determination and written reasons directly to the party that it directly contracts with and the individual themselves. If the end user client determines that, but for the intermediary, the individual would be an ’employee’ of the end user for tax purposes, the end user will need to account to HMRC for Income Tax and National Insurance contributions (both employer and employee) on any fees it pays to the intermediary (excluding VAT). At present, the responsibility lies with the intermediary, so this is a significant shift.
How to prepare for the changes
If you’re not a small business owner in line with the above and are impacted by the reforms then you should start to prepare now by doing the following:
- look at your current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through Personal Service Companies (PSC’s)
- determine if the new off-payroll rules will apply for any contracts that will extend beyond April 2020
- start talking to contractors about the upcoming changes and how it could impact them
- put processes in place to determine if the off payroll rules apply to future engagements
- appoint key stakeholders within various business units to assist with determining status
- ensure all new contractor agreements (and any extensions of existing contracts) are consistent with the new rules.
For those businesses where their arrangements are inside IR35, the extra costs going forward could be significant. In addition, HMRC has the ability to recover PAYE and NICs for the last six years. If an end user client determines that the relationship is one of employment it could result in significant historic exposure for the contractor’s PSC. There is nowhere to hide and if your business is impacted it’s vital that you begin planning now as it could take significant time to review your current working relationships and apply the criteria to determine if individuals fall inside or outside of IR35.
For those with PSC’s it can be tricky to determine your employment status, but thankfully you can make sure you’re adhering to IR35 rules by taking the HMRC IR35 test. This simple 10 minute test will help to determine if you are ‘inside’ or ‘outside’ IR35.
If you are worried about the impact of the upcoming changes to your business contact us today
for a free, no obligation chat.
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