Call +44(0)161 941 4000
Call +44(0)161 941 4000
Many businesses rely on contractors and freelance workers as a source of readily-available and cost-effective labour, whilst contractors enjoy the freedom that comes with being their own boss. However, such arrangements could now be at risk due to upcoming changes to the IR35 tax regime.
The reforms could affect hundreds of thousands of businesses and contractors, with businesses facing higher costs and contractors experiencing a drop in their income. There will be additional administrative burdens for both parties.
The IR35 rules have been in place for many years and were designed to prevent tax avoidance by contractors who were claiming to be self-employed for tax purposes, but who were actually concealing an employment relationship behind a PSC.
The IR35 regime ensures that the correct employment taxes are paid, but it does not apply if there is a genuine self-employment or a consultant relationship. At present, within the private sector, the PSC is solely responsible for assessing the contractor’s employment status and deciding whether the IR35 regime applies. If it does, the PSC is responsible for ensuring that income tax and National Insurance contributions are remitted to HMRC. However, this is set to change next year (in a similar way to changes that were made in the public sector in 2017).
From 6 April 2020, the responsibility for applying the IR35 rules and determining employment status will shift from the PSC to the Client.
If the IR35 regime applies, payments made by the Fee Payer to the PSC will be treated as employment income. The Fee Payer, rather than the PSC, will have responsibility for remitting income tax and National Insurance contributions to HMRC.
From 6 April 2020 medium and large-sized private sector businesses will need to apply the modified IR35 regime.
The IR35 rules will apply to a company if they meet two or more of the following conditions:
The modified IR35 regime also applies to connected and associated companies within a group. If a parent company qualifies as a medium or large-sized business, then its subsidiaries will also have to comply with IR35.
Those companies who do not meet the test will not need to apply the new regime and PSC companies that are engaged will continue to apply IR25 on the current basis.
Clients that qualify must start applying the new rules from 6 April 2020.
If a Client does not qualify on 6 April 2020, it should continue to monitor its position in case circumstances change.
Businesses will be relieved to hear that these reforms are not retrospective. HMRC will not be investigating arrangements with PSCs pre-dating 6 April 2020. When considering their IR35 obligations, business should therefore not look into historic arrangements. Instead, they should focus on any ongoing relationships with PSCs.
Assess employment status
If the IR35 regime applies, the Client will be responsible for determining the individual contractor’s employment status. This must be done for every contract the Client agrees with an agency or a PSC.
To assess the employment status of the contractor, the Client must consider the practical realities of the working relationship. There is no exhaustive list of criteria, but the following are important factors:
The law around employment status is complex and changeable. Each case will turn on its own facts and Clients have an obligation under the new IR35 rules to exercise reasonable care when carrying out the assessment. Therefore, advice should always be sought where there is any doubt. Our team of employment experts are experienced at advising clients on employment status issues.
Notify the relevant parties
Once employment status has been determined, the Client must notify the individual contractor and the entity it has contracted with (which may be the PSC or a different company) of the decision and its reasons.
Notice of the decision must be passed on before, or on the date, that the contract is entered into. If the work starts later, notice should be given before that later date.
The decision should be passed on even if the IR35 rules are found not to apply. If the rules do apply, then the Client will be liable for income tax and National Insurance contributions until the notice has been given.
If a party in a contractual chain receives the notice but does not pass it on to the next party, they automatically become the Fee Payer and will be responsible for deducting tax and National Insurance contributions and paying these to HMRC. In contractual chains, parties should act swiftly in passing the notice down the chain until it is received by the PSC. In simpler arrangements, the Client will be giving notice directly to the PSC.
Deal with any disputes
The contractor, the PSC and/or other companies may disagree with the decision on the contractor’s employment status. The Client should have processes in place for dealing with disagreements, which should include:
Whilst a Client considers the disagreement, it must continue to apply IR35 in line with its original decision. The Client must respond to the complainant and the contractor with a decision within 45 days or liability for tax and National Insurance contributions passes to the Client.
The Fee Payer’s responsibilities
Once any disagreements have been resolved, and employment status has been determined, the Fee Payer must account to HMRC for any due payments of income tax and National Insurance contributions. This must be done on any payments made to the PSC that are deemed to be employment earnings.
The Fee Payer will not be responsible for deducting student loan repayments. The Fee Payer is also not responsible for statutory payments and other employment rights, such as holiday pay and auto enrolment in a pension, which instead arise through the individual’s employment with the PSC.
For more information on this and other employment law issues please contact our employment law specialists via email or call 0161 941 4000.