Crackdown on IR35 rules – what do businesses need to know?
IR35 anti-avoidance legislation is being extended to the private sector for the first time from April 2020 as the Government seeks to curb the fast moving gig economy and to generate more employee income tax and national insurance contributions.
Background – what is IR35?
The IR35 regime was introduced by HMRC to prevent individuals avoiding paying employee income tax and national insurance contributions by working through an intermediary, usually a professional services company.
The rules apply where an individual provides their services through an intermediary to another person or entity (the client) and would be taxed as an employee if they had been hired directly by the client. Under the current regime, it is the responsibility of the intermediary to determine whether the IR35 rules apply and, if so, to account for income tax and national insurance contributions. The intermediary takes all of the risk. No obligation or risk is placed on the client as the end-user.
In 2017 the Government tightened up the IR35 rules, making public bodies responsible for deciding whether a worker should be regarded for income tax and national insurances purposes as an employee. These rules will now be extended to certain private organisations from 6 April 2020.
New IR35 rules from 6 April 2020
The new rules will apply to medium and large-sized private sector businesses, whilst continuing to apply to the public sector.
A large or medium sized organisation that engages individuals who provide their services via a professional services company will be required to make a determination of the employment status of those workers. If the client determines that the worker is an employee for tax purposes, then the organisation paying the worker’s professional services company will be treated as an employer for income tax and national insurance contribution purposes. The end user client would therefore be required to include the worker on its pay-roll and will be responsible for operating PAYE on the payments made to the professional services company.
The onus is therefore shifted to the end-user client to determine the status of the worker and to account for tax and National Insurance Contributions.
How to prepare ahead of April 2020
Given the impact that these reforms will have on medium to large-sized companies in the private sector which engage individuals through an intermediary, it will be important that such organisations take advantage of the time available before April 2020 to prepare.
Key actions to be taken ahead of time include:
Consider whether you are impacted by these changes. Not all organisations will be affected but only those which are deemed to be medium or large-sized under Companies Act legislation. There are a number of tests including turnover, balance sheet assets and number of employees and these should be assessed carefully to determine whether you fall into this category.
Review your workforce. You will need to determine whether your engagements include professional services companies and agencies that supply labour to them.
Undertake an audit of current off-payroll engagements. Companies will need to give careful thought to what each individual does in practice and what kind of contract they are engaged under. Legal advice should be sought in determining the employment and tax status of workers where this is not clear. Consistent and transparent decision making in this context will be crucial.
Communicate the outcome of the audit. Once you have determined the status of your workers you will need to provide the status determination to both the intermediary and directly to the worker themselves.
Set up a process to manage disagreements. Consider and set up a process to manage any disagreements between yourselves and the worker concerning the determination of employment status in order to quickly resolve disagreement, based on the parameters of the legislation.
Undertake a system review. Review internal systems such as payroll software and on boarding policies to see whether any changes need to be made to ensure ongoing compliance.
It is not difficult to see the reasons why the Government has chosen to extend the ambit of IR35 in this way and it may be that this will be further extended to small organisations before too long. This will have a particular impact on those places, such as London, where the gig economy is strong and growing. The Uber case decided in 2018 highlighted the types of practices adopted by employers in London and elsewhere and the onus will now be on the employer not only to determine status but also to account for tax and NIC due as a result.
Valerie Lambert is a Partner in the employment team of leading law firm Hewitsons