IR35 and the private sector changes

It’s been over a year since our blog ‘IR35 – Where are we now?’ and last month saw HMRC publish the draft legislation on the changes to private-sector contractors. The new rules are being introduced from 6 April 2020 despite several calls from industry bodies, including the accountancy profession, to delay their start. Serious concerns have been raised about HMRCs CEST tool (check employment status for tax), which is designed to help businesses and contractors determine the employment status of their engagement. The government has accepted that they need to invest time in improving the online tool although it remains to be seen if this can be carried out before the rules come into force.

What is perhaps more startling is that ‘The Recruitment and Employment Confederation’ claimed earlier this year that most private-sector contractors were unaware of the tax changes even though around 170,000 individuals are expected to be affected potentially resulting in their annual income reducing by significant sums each year.

So what should you be doing?

Well firstly it should be noted that small companies are exempt from the rules so where the end client falls within this exemption the IR35 ‘decision’ remains with the personal service company itself. To be a small company in a year, two or more of the following conditions must be met:

  • Turnover of no more than £10.2 million
  • Balance sheet total of no more than £5.1 million
  • Employees less than 50

Various ‘avoidance’ rules are in place to ensure that subsidiaries and associated companies cannot take themselves outside of the rules by claiming small company status.

Where the end client is medium or large the new rules will apply and it will therefore fall on the ‘end client’ who receives the services of the personal service company worker to make a decision as to whether or not IR35 would apply in relation to the engagement. The ‘fee payer’ will be the party responsible for ensuring the correct tax treatment is applied to any payments made to the personal service company. The fee payer may or may not be the end client depending upon the arrangements.

The draft legislation confirms that the end client must produce a ‘status determination statement’ (SDS). This is a written record of the reasoning and ultimate decision as to whether or not IR35 applies to the engagement. The SDS must be given to the personal service company worker and to the party directly below the end client in the chain of supply. If the end client does not produce the SDS then it becomes the ‘fee payer’. Where there is a complex supply chain it remains to be seen just how much of an additional burden this creates.

The end client must also put in place its own ‘disagreement’ process so that the personal service company can raise any objections to the decision. The end client has 45 days to respond otherwise they will again become the ‘fee payer’. For large end client organisations it is therefore essential that this process is prepared and implemented well in advance in order to avoid a raft of ‘disagreements’ at the beginning of the new tax year.

As you would expect there are also provisions to allow any ‘non compliance’ of the rules and the recovery of unpaid tax and NI to pass to any party to the arrangments.  Again, this could have a significant effect upon the end client if there is non compliance further down the chain.

There remains several questions over how this will all operate in practice and the effect of this upon the labour market should not be underestimated. End client organisations will need to ensure that they have the specialist knowledge of IR35 to be able to consider and produce the SDS’s and administer the disagreement process. All personal service companies should review their current engagements to consider whether or not they fall within the IR35 rules. This review may then form the basis of any ‘disagreement’ process should the end client conclude that the enagement falls within IR35.

If you have any concerns or questions regarding the new legislation or want to understand how this may impact on you then contact one of the team now on 01892 507288 or via email