How to prepare for IR35
From April 2020, the Government plans to introduce new legislation through the off-payroll working rules, commonly known as IR35. This is to combat the perceived abuse of tax and national insurance contributions relating to off-payroll labour in the private sector. So, how can you prepare for IR35? Here’s what you need to know.
What is IR35?
IR35 refers to the off-payroll working rules, which were first introduced in 2000 to help address the issue of ‘disguised’ employment.
It is a set of tax rules to make sure that workers, who would have been an employee if they were providing their services directly to the client, pay the same tax and National Insurance contributions as employees.
What changes from April 2020?
Currently, if you are a worker and your client is in the private sector, it’s your intermediary’s responsibility to decide your employment status for each contract. The private sector includes third sector organisations, such as some charities.
From April 2020 it will be the responsibility of all public sector authorities and medium and large-sized private sector clients to decide if the rules apply.
It is worth noting that if a worker provides services to a small client in the private sector, then the worker’s intermediary will remain responsible for deciding the worker’s employment status and whether the rules apply.
Could you be affected?
You may be affected by these rules if you are:
- a worker who provides their services through their intermediary
- a client who receives services from a worker through their intermediary
- an agency providing workers’ services through their intermediary
If the rules apply, tax and National Insurance contributions must be deducted from fees and paid to HMRC.
When do the rules apply and the Simplified Test
The rules apply if a worker provides their services to a client through an intermediary but would be classed as an employee if they were directly contracted.
The rules apply to all public sector clients and private sector companies that meet two or more of the following conditions:
- you have an annual turnover of more than £10.2 million
- you have a balance sheet total of more than £5.1 million
- you have more than 50 employees
A simplified test also applies to some clients and considers annual turnover. You must apply the rules if you have an annual turnover of more than £10.2 million and are not:
- a company
- a limited liability partnership
- an unregistered company
- an overseas company
There are also rules which cover connected and associated companies. If the parent of a group is medium or large, their subsidiaries will also have to apply the off-payroll working rules. You can find out more of the gov.uk website here.
If you meet the conditions above, you must start applying the rules when the changes come into force on 6 April 2020.
If you use the simplified test to determine your size, you must apply the rules from the start of the tax year following the end of the calendar year when you met the conditions.
If you do not use the simplified test and do not meet the conditions on 6 April 2020, your circumstances may later change. If for two consecutive years you then meet the conditions, the date you need to apply the rules will be different. You are required to apply the rules from the start of the tax year following the end of the filing period for the second financial year when you met the conditions.
What to do if you are a client
As a client, it is your responsibility to decide the employment status for each contract you agree with an agency or worker.
You need to ensure that each determination is reviewed based on its own facts. While the HMRC provides a tool to help with this – Check Employment Status for Tax – you should not use this alone to make a decision.
- pass your determination and the reasons for the determination to the worker and the person or organisation you contract with
- make sure you keep detailed records of your employment status determinations, including the reasons for the determination and fees paid
- have processes in place to deal with any disagreements that arise from your determination
If you conclude that the IR35 rules apply to a worker, then the responsibility to apply the correct tax treatment to payments made to the intermediary will lie with the fee-payer.
The fee payer is usually the organisation that is paying the intermediary for the worker’s services.
The fee-payer is required to collect and remit the tax and National Insurance deductions to HMRC and also submit information to HMRC about the payments using Real Time Information.
The fee-payer will also be liable for secondary Class 1 National Insurance contributions and, where relevant, the Apprenticeship Levy.
You can get more information on the gov.uk website here.
What to do if you’re an intermediary
An intermediary will typically be a worker’s personal service company, but could also be a partnership, a managed service company, or another person.
From 6 April 2020, all public sector clients and medium or large-sized private sector clients will be responsible for deciding your worker’s employment status. This includes some charities and third sector organisations.
If the off-payroll working rules apply, your worker’s fees will be subject to tax and National Insurance contributions.
If your worker provides services to a public sector client, or a medium or large-sized private sector client, they:
- should get an employment status determination from the client, as well as the reasons behind that determination
- will be able to dispute the determination given to them if they disagree with it
If your worker does not get an employment status determination, this may be because they are providing services to a small client in the private sector, as the rules are not changing for these clients.
If you do not receive a status determination from the client you, as the intermediary, should determine whether the off-payroll working rules apply. You can get more guidance on the gov.uk website here.
Steps you can take now
HMRC advise taking the following steps to start preparing for the new legislation:
- 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.
- Determine if the off-payroll rules apply for any contracts that will extend beyond April 2020. You can use HMRC’s Check Employment Status for Tax service to do this.
- Start talking to your contractors about whether the off-payroll rules apply to their role.
- Put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.
If you found this information useful, you may also want to check out the following:
- Who should you hire – a contractor or an employee?
- How to claim the new Structures and Buildings Allowance
- Don’t wait until the last minute to use your tax allowances
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