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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 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.
What about the review of IR35 that has been announced?
On 7th January 2020 the government announced a review into the implementation of the IR35 changes. They said that the review would be completed by February 2020. Accounting Wise will be responding to the consultation.
This is, however, not an indication that the IR35 changes would be watered down or delayed – but rather that the government wants to ensure that these changes are implemented “as smoothly as possible”.
So, with no delay announced and less than 3 months to the implementation date, it’s vital that contractors and recruiters understand how these changes will affect their business and how to help their end-clients determine whether their contracts are inside or outside of IR35.
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. Our IR35 Hub has all the help and support you need to understand IR35 and how it affects you.
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 (SBE) 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 SBE for public sector organisations and the legislation will apply to all end-clients engaging PSC workers.
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. However, it does state disputes should be reponded to in writing within 45 days.
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)
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.
