Thursday 12th September 2019
The IR35 rules, also known as the ‘off payroll rules’, are to ensure that any worker who is contracted via an intermediary, such as a personal service company (PSC), and who would otherwise be considered an employee, pays tax and national insurance contributions (NICs) as a normal employee would.
Since April 2017 public sector organisations have had to work out if an engagement falls within the IR35 regime and, if so, to report and account directly for the payment of the correct income tax and NIC payments. 6 April 2020 is the proposed date for this obligation to be extended to medium and large private businesses.
It will be for employers to assess which of its contractors, engaged via intermediaries, would otherwise be considered as employees (the ‘deemed employment test’). For those who, in employers’ eyes, fall within the ‘deemed employment test’, they will have all PAYE tax and NICs deducted at source, which will be accounted to HMRC. Whilst full details aren’t available yet, it is expected that late payment interest will be applied, along with other penalties, for failure to comply.
Employers’ decisions will be open to challenge by those who are taxed at source. Employers will need to be prepared to either confirming or reassess their decisions within 45 days of receiving representations.
In advance of April 2020, there are a number of steps towards compliance which employers will need to take including:
- Determining if their business is a medium or large company, defined as such if it has two of the following characteristics:
- turnover of more than £10.2 million
- balance sheet total of £5.1 million
- more than 50 employees
- Identifying any services provided by individuals though PSCs or other intermediaries.
- Determining if the off-payroll rules apply to any of these individuals. There is an HMRC test that can be carried out online to determine if IR35 applies (this test can be found here). HMRC will stand by the result, provided the questions are answered correctly. If the result is that IR35 does not apply, a copy should be kept to show that the test has been done.
- Where IR35 applies, putting in place the necessary measures, including consultation with affected contractors and starting an ‘onboarding’ process to ensure that income tax and NICs are reported and accounted for with effect from April 2020.
- Ensure that any future engagements via PSCs or other intermediaries are assessed before they begin to determine if they fall within the scope of IR35 or not.
Employers should err on the side of caution when applying the ‘deemed employment’ test, as it is highly fact sensitive and has been subject to inconclusive litigation in the Tax Tribunal.
We recommend that employers review their contracts with contractors engaged via an intermediary/PSC to minimise the risk that IR35 will be deemed to apply. However, a word of warning: what is in the contract should reflect what actually happens and should not be an attempt to disguise the true position and avoid paying tax.