In July, HMRC unveiled further information about the changes to off-payroll working rules, also known as IR35, due to come into effect in April 2020. Although HMRC proposed these a while ago, the government has only recently released the full details of what this means. As such, many small businesses may not be up to speed with future changes. We take a look at how things will be different, and what this could mean for your business.
A revised system
HMRC introduced the original IR35 legislation back in April 2000 and amended it further in 2017. The aim of these rules was to prevent contractors from abusing employment laws. Previously, contractors could claim they were self-employed through their own private companies. This allowed them, and the companies employing them, to pay less tax and National Insurance Contributions.
HMRC introduced the original IR35 legislation back in April 2000 and amended it further in 2017. The aim of these rules was to prevent contractors from abusing employment laws.
With the introduction of the April 2000 rules, contractors and their intermediaries had to apply a set of employment tests. These would determine whether they were inside or outside the IR35 legislation. Those who came within the rules have to deduct both the employer’s and employee’s NICs from earnings attributed to the contract in question. As a result, these contractors ended up paying significantly more tax. These rules are now changing.
HMRC are calling the reform to IR35 the off-payroll tax. Although many of the same rules apply, the client rather than the contractor bears most of the responsibility. Here are some of the major changes you'll see:
Assessment. The client, rather than the contractor, must assess the contractor’s IR35 status for every engagement.
Taxation. The fee-payer, usually the recruitment agent or client, is responsible for reporting and processing the tax. This is done via PAYE and applies to payments to contractors who are employed for tax purposes.
Liability. The fee-payer (again, recruitment agent or client) becomes liable for the employer’s National Insurance. In addition, they’re also responsible for the Apprenticeship Levy where applicable. These are paid on top of fees paid to the contractor. The fee payer also takes on the tax liability risk should the status be challenged.
Reasonable care. Clients must take ‘reasonable care’ when assessing IR35 status. If they don’t, the client automatically assumes the position of fee-payer.
What this means for you
The exact impact of IR35 on your business depends on how you operate. For example, if you are a medium-sized business using contractors:
You must pass on the employment status determination (whether they’re IR35 inclusive) for each contract agreed with a worker or their intermediary.
You must keep records of why you’ve reached that determination, as well as inform the worker of these reasons.
Finally, you must have a dispute process in place in case a worker disputes your decision.
For those whose companies are classed as small, this responsibility still rests with the worker’s intermediary. It’s worth checking out the full regulations to make sure your company is prepared for the changes.