Update 18 March 2020:
In a move which will be welcomed by beleaguered businesses, the planned roll out of the IR35 to the private sector has been postponed for a year
Chief Treasury Secretary Steve Barclay announced yesterday evening that the IR35 tax reforms would be pushed back by one year, less than a week after the measures were confirmed in the Budget.
He added that this move is part of a broad package of measures which the Treasury has announced to protect the economy from the coronavirus outbreak.
He confirmed that the decisions was “a deferral, not a cancellation, and the government remains committed to reintroducing this policy”.
OFF-PAYROLL WORKERS – THE CONTDOWN STARTS
Any clients who use the services of off-payroll workers will need to get ready for the extension of the IR35 reforms to the private sector from 6 April 2020. An off-payroll consultant is broadly anyone who is not employed by you or by another business under a PAYE arrangement and invoices you from their personal service company (PSC).
SRC-Time can help you understand the potential impact, identify any areas of potential risk and implement necessary changes to be ready for the deadline
Who will be affected?
The new rules will apply to medium and large businesses. HMRC have not defined what will constitute a small business. It is our understanding that “similar criteria” to the Companies Act 2006 definition of a small company will be used.
These are:
• The company’s annual turnover doesn’t exceed £6.5 million
• The balance sheet total (meaning, the total of the fixed and current assets) doesn’t exceed GBP 3.26 million
• The company employs no more than 50 personnel
As one of the criteria mentions ‘not more than 50’ personnel, it remains to be seen how relevant individuals will be counted (for example, whether or not ‘deemed’ employees engaged via PSCs are counted for this purpose).
It is important to note that the date of payment determines whether the new rules apply, so a contracted that ends in March 2020 but in respect of which the final payment is made after 6 April 2020 will be caught by the new rules.
What will change?
The changes will affect any business that engage workers through PSCs, or any other intermediary such as a partnership or LLP. The new rules will require the engager to assess if the intermediaries rules (IR35) apply to the contracts it enters into with any PSCs that are hired either directly or via third parties, such as agents.
Having determined that IR35 applies, the person or business paying the PSC (the fee payer) must apply PAYE/NIC deductions to payments for the worker services. In practice, it will have to treat the off payroll worker as a deemed employee for tax purposes. In addition, the fee payer must also account for employers NIC and potentially the Apprenticeship Levy.
How to apply IR35 tests
In the absence of a statutory employment status test, HMRC will expect businesses to use the existing on-line CEST tool as their primary point of support. CEST stands for ‘Check Employment Status For Tax’.
Based on the answers inputted, CEST gives an automated determination. HMRC will stand by that decision, provided it agrees with how the person taking the test has answered the questions.
It is safe to say the response to CEST from both the private business community has been on the whole negative, with many disagreeing with the determinations given by the tool. Just to add to the confusion, the results coming from the courts on status disputes are, in many circumstances, completely different to the results given by CEST. HMRC plan to update the CEST tool in the light of both cases determined by the courts and user feedback.
In a dispute with HMRC, it may review the processes an employer or worker has used for determination, including whether or not they have used the CEST tool.
In order to use the tool you will need to understand your historic, current and anticipated use of off-payroll workers, as well as the existing contract portfolio with PSCs.
Reviewing contracts, you will need to consider if they remain appropriate going forward. They may need to be replaced or be subject to written amendment in the event that IR35 will apply to a particular arrangement.
Next you should consider what compliance processes should be put in place to ensure that an IR35 assessment is completed before engaging with a worker supplied via a PSC. Establish clear lines of responsability for performing the IR35 review process, and consider the actual technical knowledge of key staff members (ie if there is a need to train and support these staff).
YOUR CONSULTANCY BUSINESS – APRIL 2020 CHANGES
Background
IR35 (also known as the ‘off-payroll rules’ or the ‘Intermediaries Legislation’) is part of the UK tax rules affecting contractors. When introduced, it was designed to ensure a level playing field between contractors and employees doing the same job in the same manner. The idea was that contractors would not receive an unfair income tax and national insurance (NI) advantage.
If a contractor’s arrangements are assessed as being ‘inside of IR35’ (which means that the contractor’s working arrangements resemble those of an employee), income tax and NI must be deducted from the contractor’s pay.
At present, in the private sector, the responsibility to assess whether the arrangements are inside or outside of IR35 and to make the required tax deductions is on the consultant’s personal service company (PSC).
HMRC’s view is that a significant percentage of contractors do not assess and pay over tax & NI correctly, hence these reforms. This change will put contracting in the public sector and the private sector on to a level footing.
What’s new
From 6 April 2020, the responsibility for determining whether your assignment is inside or outside of IR35 will pass to the final service recipient (the engager)
The responsibility for calculating and remitting tax & NI from your pay will also transfer to the party which pays your limited company (usually, this will be an employment agency).
The change will not apply where the engager is a small company, which means a company which meets any 2 of the following criteria:
• Annual turnover of not more than £10.2 million;
• A balance sheet total of not more than £5.1 million;,
• No more than 50 employees.
Where the end-client is a small company, the responsibility for assessing and paying tax will stay with your PSC.
The size of the employment agency, if one is involved, is not relevant.
What you need to do
For existing assignments If you are currently providing consultancy services through a PSC and your assignment will continue beyond 6 April 2020, the engager will be required to determine whether your assignment is inside or outside of IR35 prior to that date.
If the assignment (or payments made in relation to it) will continue after 6 April 2020 and the engager decides that the assignment is inside of IR35, you may be required to change the model through which you engage with the paying company the remainder of the assignment. Essentially, if the end-client determines that your assignment is inside of IR35, the paying company will be required to deduct income tax and NI from your pay and remit this to HMRC.
If the engager decides that your assignment is outside of IR35, you will be able to continue working through your PSC and no tax & NI deductions will be made by the paying company
For assignments starting after 6 April 2020, engagers will need to specify whether an assignment is inside or outside of IR35 before the engagement starts and will make the status of the assignment clear to you and the paying company..
CEST – a solution?
The Government’s online Check Employment Status for Tax (‘CEST’) tool is designed to help determine whether an assignment is inside or outside of IR35.
The Government’s IR35 help service is also available if CEST does not provide a clear answer:
Web https://www.gov.uk/guidance/ir35-find-out-if-it-applies
However, it is up to the engager to determine IR35 status and they may opt to use alternative tools/methods to make their decision.
Resolving disputes
The new legislation requires engagers to provide a ‘status disagreement process’ for contractors to challenge their IR35 determination.
Engagers are obliged to provide contractors with an IR35 Status Determination Statement (SDS), stating whether their assignment is inside or outside of IR35, and written reasons for the determination. If a contractor disagrees with the SDS, he/she has the right to make representations to the engager about why they believe the SDS is incorrect and the engager has 45 days to consider these and either change its SDS or give its reasons for deciding that the original SDS was correct.
The Bottom Line
If your income will be subject to the deduction of tax & NI at source, you will need to increase your fees to provide the same level of income which may make your offer uncompetitive in the market place. In addition you will still have the time and costs associated with running your PSC.
It may seem advantageous to become an employee and shed these costs, but engagers may not want to take on the whole package of employers obligations and employee rights.
A middle ground solution may be to contract though an umbrella company. This is a payroll provider for contractors, which acts as your employer, runs your payroll, and offers additional support such as administration. It will charge a fee for this on either a weekly or monthly basis. Often there are additional benefits such as an auto-enrolment pension scheme and low-cost life assurance plans.
Impact Example
2019/20
Gross income (billings) 70,000
Overheads 1,500
Salary 8,600
Taxable profit 59,900
Corporations tax (19%) 11,381
Net profit = dividend 48,519
Total income 57,119
Personal allowance 12,500
Taxable 44,619
Tax at 0% on £2,000 0
Tax at 7.5% on £42,619 3,196
Net income £53,923
2020/21
Gross income (billings) 70,000
Personal allowance 12,500
Taxable 57,500
Tax at 20% on £37,500 7,500
Tax at 40% on £8,000 8,000
NIC 5,364
Net pay 49,136
Overheads 1,500
Net income £47,636
This is a reduction of £6,287 in take home pay.
If the end user reduces the rate of pay to reflect the Employer NIC they have suffered (as has been common since 2017) the gross income becomes £62,558 (giving a gross cost to the engager of £70,000). This results in net income of £43,319, a reduction of £10,604 in take home pay.
12 March 2020
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