IR35 payroll rules extended to private sector April 2020 What does the changes mean?


On 6 April 2020 the IR35 rules in the private sector will change. In brief the IR35 rules apply where an individual works through an intermediary, such as a personal services company, and provides their services to an end user client. If that intermediary did not exist, but the individual looked like an employee of the client for tax purposes, then that assignment is deemed to be ‘inside IR35’ and the individual’s pay should be subject to PAYE tax and national insurance. Employers’ national insurance will also be due. Under the current IR35 rules in the private sector the intermediary is responsible for assessing the individual’s status. However in April 2017 the rules changed in the public sector – under these ‘off payroll rules’ the public authority which is the end user client must assess status for tax purposes. If the role is inside IR35 then the fee payer (which is the party next to the intermediary, usually an agency) must make the appropriate deductions before it pays the intermediary. The agency then reports those payments via its Real Time Information (RTI) report. If the role is ‘outside IR35’ the intermediary remains responsible for tax and national insurance.


The Government believes that there is significant non-compliance with the IR35 rules in the private sector and so in 2018 consulted on how to best improve compliance in that sector. At Budget 2018 the Government confirmed that it would extend the off payroll rules into the private sector from April 2020.


What does it mean for the contractor?
When the role is “inside IR35” the intermediary will no longer be responsible for tax and national insurance. As tax and national insurance will be deducted by the agency from the gross sum due to the intermediary, the intermediary will receive a lower net sum for onward payment to the contractor. The intermediary will still be responsible for expenses, VAT and corporation tax. Contractors may seek higher rates of gross pay to make up for the shortfall but experience in the public sector has been mixed – some clients will pay an uplift to retain the services of a particular contractor but others will not as they also face an increased employers’ national insurance bill.

Importantly, employment status for tax purposes is not the same as employment status for employment rights purposes. There are a number of cases where status has been challenged for tax purposes whilst there are others where the issue has been employment rights. However at the moment there is no direct correlation between tax and employment status.

On 6 April 2020 the IR35 rules in the private sector will change. In brief the IR35 rules apply where an individual works through an intermediary, such as a personal services company, and provides their services to an end user client. If that intermediary did not exist, but the individual looked like an employee of the client for tax purposes, then that assignment is deemed to be ‘inside IR35’ and the individual’s pay should be subject to PAYE tax and national insurance. Employers’ national insurance will also be due. Under the current IR35 rules in the private sector the intermediary is responsible for assessing the individual’s status. However in April 2017 the rules changed in the public sector – under these ‘off payroll rules’ the public authority which is the end user client must assess status for tax purposes. If the role is inside IR35 then the fee payer (which is the party next to the intermediary, usually an agency) must make the appropriate deductions before it pays the intermediary. The agency then reports those payments via its Real Time Information (RTI) report. If the role is ‘outside IR35’ the intermediary remains responsible for tax and national insurance.

The Government believes that there is significant non-compliance with the IR35 rules in the private sector and so in 2018 consulted on how to best improve compliance in that sector. At Budget 2018 the Government confirmed that it would extend the off payroll rules into the private sector from April 2020.


What do the changes mean for the end user client?
End user clients will have to assess the IR35 status of each assignment where the services are provided by a contractor working through an intermediary. This means that the end user client will have to understand the IR35 rules and use an appropriate assessment tool to reach an accurate decision. The Government has produced an online ‘Check employment status for tax’ tool (CEST) and provided the information put into the tool is correct at the time, HMRC have said they will stand by the result it produces. In order to properly assess tax status, clients will have to answer questions such as:

• Does the contractor have a material interest in the intermediary (e.g. does the contractor own more than 5% of the shares – if not, the rules do not apply).
• Does the client require the contractor to personally provide their service or will the client permit substitution or sub-contracting?
• What financial risk does the contractor take? e.g. will they have pay to correct work themselves?
• Does the contractor have multiple clients or are they reliant on the client for most of their work?
• How long will the assignment last?
 

However there are industry concerns about CEST and as it is not obligatory to use this tool, clients could use any IR35 review tool they wish. The question will be whether agencies will want to rely on the results of other tools, particularly if they are liable for the status decision. The client will then have to pass the status decision to the agency it has a contract with.


**source REC January 2019

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