Update: The final version of the private sector IR35 rules are now included in the Finance Act 2020, which received royal assent on 22 July 2020. The IR35 rules will enter into effect on 6 April 2021.
Effective 6 April 2020, the existing off-payroll working rules (IR35) in the public sector will be extended to private sector employers. IR35 rules will mandate medium and large employers in all sectors of the economy to determine the employment status of their contractors for tax purposes. Employers who do not choose the correct status for a “deemed” employee will be liable for any missing taxes.
IR35 rules were introduced in the public sector in 2017 to stop individual contractors (workers) and employers from avoiding employee status for tax savings. Private sector contractors tend to provide their services through their own intermediary company (usually a Personal Service Company (PSC) or a partnership), which pay them a dividend. As a result, both the contractor and employer can save the 13.8% national insurance contribution as well as other tax savings.
Currently, contractors are responsible for assessing their employment status for tax purposes and operate under pay-as-you-earn (PAYE), deducting National Insurance Contributions (NIC) on the fees that their intermediary company receives if they are found to fall within the scope of IR35 rules (when employee status is established).
Beginning 6 April 2020, IR35 rules will be extended to medium and large employers in the private sector. Small private sector employers with annual turnover less than GBD 10.2 million for two consecutive financial years or if they have less than 50 employees will be exempt from the new rule. The entities affected by the change are:
- Contractors supplying their services through a PSC.
- Employers hiring workers through intermediary companies.
The reform is not retrospective and therefore Her Majesty’s Revenue and Customs (HMRC) will focus on ensuring businesses comply with the reform for new engagements rather than historic cases.
Status determination statement
The employer will be mandated to provide a status determination statement for the worker’s employment status to the contractor and the intermediary company before making the first payment to the contractor. The statement should provide a detailed explanation of the reasons justifying the choice of status. Failure to comply with the new requirement may transfer PAYE and NIC liabilities from the intermediary company to the employer.
Dispute resolution process
Contractors have the right to dispute the employer’s status determination statement. Contractors are unlikely to dispute a status determination statement which concludes that they fall outside the scope of IR35 (when employee status is not established).
Employers should keep detailed records of their employment status determinations and establish a comprehensive process to deal with any disagreements that arise from their determinations.
To ensure proper compliance, employers may want to use the “Check Employment Status for Tax” (CEST) tool developed by HMRC and available here. CEST may be used in the following circumstances:
- By the employer when hiring a worker.
- By the worker or the intermediary company when discussing a potential hire with an employer.
- When there has been a change to an existing contract or service agreement.
- When the worker disagrees with the employer’s status determination statement.
Employers are not mandated to use CEST. However, the tool does provide the main issues that employers should take into consideration when preparing the status determination statement, and so long as all the information entered by the employer is up to date and accurate, HMRC is bound by the result. The main criteria to determine a worker’s status is whether the employer has control over their work as well as their working hours and location.
Employers who receive services from contractors through an intermediary company should ensure they are compliant with the new rule within the timeline.
Employers may want to establish clear policies for the hiring process of contractors to ensure all requirements are met before a contractor is appointed and revise their contracts with intermediary companies to reflect the new rule. In order to avoid the administrative burden of this new requirement, employers can always:
- Hire the contractor as an employee.
- Hire the contractor directly without an intermediary company, but rather as a self-employed.
- When employee status is confirmed, require that contractors go through an intermediary company rather than a PSC.