The 2018 UK Budget confirmed the introduction of the heavily-anticipated IR35 rules into the private sector from 6 April 2020. The government reformed these rules for engagements in the public sector in April 2017.
This legislation applies in situations where a worker would be treated as an employee or an office holder of a company, if their own personal service company (PSC) did not exist. These rules ensure that workers who should have been treated as employees pay broadly the same amount of income tax and national insurance contributions as regular employees.
There is an exemption where the end client is a small company. The exact definition of what constitutes a small company has not yet been formally defined but is expected to be similar to the existing Company Law definitions and will be defined as “small” if it meets any two of the following tests:
- An annual turnover of £10.2 million or less;
- 50 employees or fewer on average; or
- Assets worth no more than £5.1 million
Impact for Employers
Currently, in the private sector it has been the responsibility of the PSC to evaluate the IR35 status for each contract and deduct tax accordingly, however the new rules put the burden of responsibility for correctly determining whether an individual is an employee with the company that engages the services of the worker (i.e. the employer if it is determined that the worker is an employee).
If an engagement falls within the IR35 rules, the employer paying the PSC, will need to make any payments with deductions of tax and national insurance. They will also be required to pay Employer’s NIC and the Apprenticeship Levy on any payments.
Any risks in association with the above tax liability will also shift to the employer. If an HMRC investigation finds that a worker has been paying tax incorrectly the employer can be targeted for backdated tax, penalties and interest, (unless the employer has taken reasonable care when assessing employment status).
What Employers Need to Do
If the implementation of the rules follows the route of the public sector, the following preparation should be considered.
- Identify any existing PSCs
Employers will need to identify whether there are any PSCs that currently provide them with services and determine if these companies are caught under the IR35 rules. If, under the new legislation, the worker should be treated as an employee, the employer will need to operate payroll for the PSC from April 2020.
- Review Contracts
Employers should ensure their contracts are robust, reflect the terms and conditions of the engagement and whether IR35 would apply.
- Adjust Payroll
Employers should have an appropriate payroll in place by April 2020 for any PSC caught under the IR35 legislation. Employers may also want to set up a separate payroll to distinguish between the tax and national insurance for “deemed workers” and those liabilities for regular employees.
- Engagement of New PSCs
When a contract is entered into with any ‘new PSC’, employers should have a process in place that will allow them to refer the engagement terms for review under the employment status tests. This will ensure that the PSC is treated correctly for tax and national insurance purposes from the outset.
For more information on any employment tax related matters please contact either: Lee Muter, Employment Taxes Partner, on 0191 243 6089 or at email@example.com; or Rebecca Kemp, Employment Taxes Consultant, on 0191 243 6070 or at firstname.lastname@example.org
For more information, click below...