The government has reaffirmed plans to make changes to off-payroll working (IR35) rules effective from 6th April 2020. This will affect any contractors working through a Personal Service Company, Recruitment Agencies, and all Large and Medium-sized end clients.
On 11th July 2019, the government published the draft legislation necessary to enact the Finance Bill 2019-20. Among other tax measures, the Finance Bill introduces important changes for workers providing services through an intermediary in the private sector (also known as ‘off-payroll working’ or ‘IR35’).
The final contents of the Finance Bill will be confirmed by the Chancellor of the Exchequer as part of the government’s 2019 Budget. The off-payroll working changes are due to take effect from 6th April 2020 and are summarised in the sections below.
Summary of changes to IR35 due to be implemented in 6th April 2020:
There are a number of changes due to be implemented in April 2020, these will have impacts on end-clients, recruiters, and contractors working through limited companies. We’ve summarised the main changes and impacts below.
The end-client is now responsible for determining whether a contract is inside or outside of IR35 rules
The changes for the private sector mean the end-client is now responsible for determining the IR35 status of a contract with a Personal Service Company (PSC). The rules will be consistent with the changes brought in for the public sector in April 2017.
Small business exemption to new IR35 rules
The legislation applies only to ‘medium or large’ businesses. There’s an exemption for end-clients who are ‘small businesses’ as defined by the Companies Act 2006 which means meeting two or more of the following criteria:
- Annual turnover is no more than £10.2 million
- Balance sheet total is no more than £5.1 million
- No more than 50 employees.
Where the end-client meets two or more of these criteria, responsibility for determining the IR35 status of a contract remains with the PSC and the changes do not apply.
The government has included clauses in the legislation to ensure medium or large businesses do not set-up arm’s length companies or subsidiaries to procure services from PSCs. The legislation will apply to the parent company based on the aggregate amount of turnover and the aggregate amount of the balance sheet total of the connected entities.
There’s no small business exemption for public sector organisations and the legislation will apply to all end-clients engaging PSC workers in the public sector.
IR35 Status Determination Statement (SDS)
The end-client must confirm the IR35 status of a contract by providing a ‘Status Determination Statement’ (SDS). The SDS must be provided in writing to the PSC worker and, if an Agency is involved in the labour supply chain, a copy must be provided to the Agency responsible for paying the PSC.
These arrangements place most of the responsibility for administering an SDS on the end-client and/or the fee payer (if an Agency is involved).
IR35 status dispute resolution process is led by the end-client
It’s the responsibility of the end-client to establish arrangements to consider any disputes from PSCs about the SDS. The legislation does not specify how such arrangements should work in practice but does state a time limit of 45 days to respond, in writing, to the PSC with the outcome of the review of the dispute.
The decision must either confirm the original SDS is upheld, or, if it involves a revised SDS or conclusion, a new SDS must be provided in line with the arrangements outlined above.
Transfer of employment tax liabilities to another relevant person
The legislation is designed to ensure the organisation with responsibility for issuing the SDS, or the fee-payer if an Agency is involved, is responsible for any employment tax liabilities arising.
The legislation also allows HMRC to recover tax liabilities from another ‘relevant person’. A relevant person is any party involved in the payment to a PSC. This means HMRC can recover tax from the highest party in the labour supply chain which is not complying with the legislation. HMRC believes this will ensure compliance with the rules across all parties involved in the labour supply chain.
5% administration allowance withdrawn (mostly)
As expected, the draft legislation removes the 5% allowance for PSCs to meet the costs of administering the off-payroll working rules. The allowance will continue for PSCs working with ‘small’ end-clients as defined above.
Check of Employment Status Tool (CEST)
The government recognises the Check of Employment Status Tool (CEST) needs to be strengthened. It’s expected that a further announcement will be made when further guidance and support for businesses is published throughout 2019.
Conclusion – The new IR35 rules will cause issues
Cloud Accounting NI responded to the government’s consultation earlier in the year. It’s disappointing that most of the issues raised by us, and other responders, have been largely ignored in the draft legislation. Of particular concern remains the:
- errors and inconsistencies contained in the government’s online Check of Employment Status Tool (CEST)
- additional investment required to complete an employment status determination by an end-client on a contract by contract basis
- removal of the 5% allowance for PSCs to administer off-payroll working rules
- risks to PSCs from the dispute resolution process which are the responsibility of the end-client to administer.