IR35: it’s been a subject of great concern for contractors since its incorporation in 2000, and it doesn’t look like this will change anytime soon. With the changes to the public sector in 2017, speculation was rife with how IR35 would be set to impact the private sector in April 2020.
* Update: at the time this article was written, the off-payroll (IR35) reforms were due to be implemented on the 6th April 2020. On the 17th March 2020, the UK government announced that it would be deferring the reforms to the 6th April 2021 to help businesses and individuals during the COVID-19 crisis. You can read more about this here.
It seems that these questions have been answered in the draft Off-Payroll legislation. On July 11th, HMRC confirmed that they will move ahead with the reforms and announced that these changes are set to largely mirror the public sector reforms.
From small business exemptions to the controversial CEST tool, we’ve analysed this reform to give you an overview of just what was announced on the 11th July, and what’s set to change in the private sector.
What changes were announced?
Several key points which are set to shake up the private sector were announced, including:
The small companies exemption
As expected, the reforms will only apply to medium and large companies. The current rules will continue to apply to contracts with small companies, as defined in the Companies Act 2006. This is HMRC’s attempt to minimise the administrative burden for small companies.
The 5% allowance
The current rules within the private sector allow a deduction of 5% prior to calculating your PAYE Tax and NI liability. This allowance is intended to compensate the PSC for the costs of administering the IR35 legislation. The PSC will no longer bear the responsibility for the determination of the IR35 status of the contract or making the payroll submissions to HMRC. As this will no longer be the responsibility of the PSC the 5% allowance will be removed for contracts with medium and large organisations. This allowance has not been available in the public sector since April 2017. This means that 100% of the contract income will be subject to PAYE tax and NI deductions.
Where the responsibility remains with the PSC, as it will for engagements with small companies, the 5% allowance will remain.
PAYE tax and National Insurance deductions will be made at source by the ‘fee payer’
If the client determines the engagement as inside IR35, the amounts paid to the workers intermediary for the workers services is to be treated as employment income. As with the public sector rules, the fee payer will be responsible for deducting PAYE tax and National Insurance and paying this to HMRC.
Introduction of a Status Determination Statement (SDS)
The legislation introduces a Status Determination Statement (SDS), this must be provided to the worker and the fee payer and include the status of the engagement and the reason for that decision. The client must have taken reasonable care to arrive at the decision in order for the SDS to be valid.
The client will have ‘fee payer responsibilities’ until they pass the SDS to the worker and the party they contract with i.e. they will be responsible for any tax liability. The last party in the supply chain to receive the determination is classified as the fee payer and will take fee payer responsibilities.
Introduction of a statutory client-led disagreement process
The legislation outlines a client-led status disagreement process, this will also apply to public sector engagements from April 2020. If the worker or the fee payer disagrees with the Status Determination Statement (SDS) they can challenge this decision. The client must respond in 45 days to inform the worker or feepayer that either the decision stands and give the reasons why it has reached that decision or give the worker and the deemed employer a revised SDS.
Debt transfer provisions
The draft legislation introduces a new power for HMRC to collect unpaid PAYE from other parties in the supply chain. This will apply to all contracts in the public sector and engagements with medium and large companies in the private sector from April 2020.
The regulations make provision authorising the recovery from a ‘relevant person’ of any amount that an officer of HMRC considers another person should have paid under PAYE regulations in respect of a deemed direct payment.
This means that if the fee payer fails to make deductions and pay the PAYE tax and NI liability, HMRC can recover the unpaid liability from other organisations in the supply chain.
Improvements to the Check Employment Status for Tax (CEST) tool
In the key information document HMRC advises that they are making improvements to CEST and the improved tool will be available for use later in 2019. HMRC’s tool has been subject to a great deal of controversy, with contractors finding the tool difficult to use. The tool has also been come under scrutiny as it has presented incorrect and misinformed assessments by missing out key points (for example, currently, it doesn’t consider Mutuality of Obligation, one of the key IR35 determining factors).
Mark Beal-Preston, Chief Commercial Officer of the Optionis Group which includes ClearSky Contractor Accounting, said:
"We're disappointed to see that many of the key concerns raised by the contractor community have been overlooked with this draft legislation. It now appears unlikely that there will be a shift in the policy or plans to implement these reforms in April 2020, and the big question for the industry is will businesses be ready in time to implement these changes without unintended consequences?
With you all the way
For many, these changes come as no surprise. Though they have been in the pipeline for some time, there are still some details to be ironed out, and for many contractors, this can cause a great deal of uncertainty.
We understand that the changes to IR35 can leave you wondering what’s next, but we’re here to help. If you’d like to discuss these changes or what they could mean for your business, simply call us on 0800 464 0376 or drop us a message.