Help your clients prepare NOW for forthcoming changes to IR35.
From 6 April 2020, the off-payroll working rules are changing for workers providing their services through an intermediary to private sector medium and large-sized organisations. This measure will have effect for contracts entered into, or payments made, on or after 6 April 2020. The private sector includes third sector organisations, such as some charities.
Summary of the key changes from 6 April 2020 are:
All public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply.
If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.
As with public sector engagements the worker’s PSC will nolonger be permitted to deduct a 5% allowance in relation to engagements with medium and large-sized clients. It will continue to be available for engagements with small organisations.
These rules are only applicable from the start of the tax year.
The size of the private company can be determined in two ways:
a) Simplified Test: You should do this if you have an annual turnover of more than £10.2 million. If you use the simplified test to determine your size, you must apply the rules from the start of the tax year following the end of the calendar year in which you met the conditions.
b) The Small Companies Regime: The Simplified test cannot be used by a company, a limited liability partnership, an unregistered company and an overseas company. In this case, the size is determined under section 382 of Companies Act 2006 if you meet two or more of the following conditions. You have:
an annual turnover of more than £10.2m
a balance sheet total of more than £5.1m
more than 50 employees.
If you do not meet the conditions on 6 April 2020, your circumstances may later change. If you then meet the conditions for two consecutive years, the date you need to apply the rules will be different. You must apply the rules from the start of the tax year following the end of the filing period for the second financial year in which you met the conditions.
Group Companies: There are also rules around connected and associated companies. If the parent of a group is medium or large their subsidiaries will also have to apply the off-payroll working rules.
Medium or large organisations: Affected private sector clients have to:
Determine the employment status of workers using reasonable care. HMRC has an anonymous tool Check employment status for tax (CEST) which can be used to indicate the workers' status based on contractual terms. This must be done for every contract they have whether with the agency or worker. If there are changes to the engagement during the course of the contract, you should reassess the status.
Note, HMRC does not consider CEST findings conclusive if it considers at any point that the contractual terms or structures were contrived to achieve a particular determination.
Once the determination is made, pass this to the worker/agency along with the reasons for it. The determinations have to be shared whether the off-payroll working rules apply or not.
The determinations have to be communicated on or before the contract date or before the work starts.
If the worker disagrees with your determination, then you need to consider the reasons for disagreement. You must provide a response with 45 days of receiving the disagreement. During this time you should continue to apply the rules in line with your original determination.
* Tell the worker if the determination has not changed. * Tell the fee-payer and the worker if the determination has changed. * If you do not respond within 45 days, the responsibility for paying tax and National Insurance contributions will become your responsibility.
If the client, agency or any other party in the supply chain fails to pass down the determination they will be considered the fee-payer and therefore assume liability for deducting tax and NI contributions and passing them to HMRC, until the determination is passed on.
Accounting and taxation
Once the contract does fall under off-payroll working rules and the tax, and national insurance is deducted by the organisations, the remaining question is how to account for this income in the books of the intermediary (normally a personal service company of the worker). It would be worth considering whether is it still beneficial to remain as self-employed, weighing all the pros and cons.
ACCA's technical factsheet looking at the accounting and tax treatment of IR35 deductions in the public sector can be followed for these purposes.