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IR35 Tax Changes

| Thu 06 Feb 2020
IR35 Tax Changes

We are sure you know already, but by way of short recap, the IR35 legislation was brought in as anti-avoidance legislation. It is aimed at the situation where a worker is working more like an employee but they are providing their service through a limited company thus avoiding the tax and NIC consequences of being employed by HMRC.

In April 2017, this changed for contractors engaged in the public sector, where currently it is the public sector body’s responsibility for making a determination as to each contractor’s engagement, and then the limited company must be paid net of tax and NIC when an engagement is deemed caught by IR35.

It is no secret that the IR35 Tax Changes in the public sector all but created chaos, left ill-prepared Government departments with a huge administrative burden, and responsibility for making decisions they were not informed enough to make. This resulted in many departments issuing blanket ‘caught’ decisions across their workforce, with swathes of contractors terminating their engagements and seeking work in the private sector.

Nevertheless, the Government decided that these IR35 Tax Changes were a success(!), and to address the disparity it created between private and public sector, the changed IR35 legislation will be rolled out to the private sector – with a few tweaks.

Here’s what you need to know about the changes from April 2020.

Who is affected by the changes?

Firstly, not everyone is affected. ‘Small businesses’ are exempt: the new legislation will only apply to medium or large businesses, and public sector organisations, that engage limited company contractors either directly or via an agency. Note that the legislation replaces that which currently covers public sector engagements.

A medium or large business is defined as ‘not a small business’ as per the definition within the Companies Act (2006). This currently states that a company is considered a ‘small company’ if, in a year, the company satisfies two or more of the following requirements:

  • Turnover of no more than £10.2 million
  • Balance sheet total of no more than £5.1 million
  • Number of employees of no more than 50
  • If a business falls within this definition the new legislation does not apply, and any limited company contractor engaged will need to make their own decision as to whether their engagement is caught by IR35 under the existing rules.

Be aware of the provisions relating to subsidiaries which means they are not exempt if they are part of a group of which the parent undertaking does not qualify as small.

What does it mean for those companies that are affected by the rules?

If the client is a medium or large business, it will have a legal obligation to make a decision as to whether or not each contractor’s engagement falls within IR35 using the traditional tests of employment status. This is the case for each and every contractor - no blanket decisions.

The client has an obligation to use ‘reasonable care’ when making the decision. They should issue a ‘Status Determination Statement’ (“SDS”) confirming its decision.

An SDS must be issued to the worker for those clients which engage contractors directly. For those that engage contractors via an agency/agencies, the SDS must be issued to both the worker, and the party in the contractual chain directly below the client.

In order to comply with its obligations in the legislation, the client should also have an appeals procedure in place to deal with representations from workers or deemed employers who disagree with the decision in the SDS.

Who is liable for the tax and NIC?

This is a little tricky, as there are provisions for the liability to move up and down the contractual chain.

Simplest of all is where the client engages the contractor directly, where the client is responsible for the tax and NIC.

Where there are other parties in the chain between the client and worker’s company, the ‘fee-payer’ - that is the party making the payment to the contractor - is treated as making the deemed direct payment. They are therefore responsible for the tax and NIC.

However, even where there is a fee-payer involved, there are circumstances in which the client will be liable which you should be aware of.

The client will be liable for the tax and NIC:

  • until and unless it issues the SDS to the worker and, if applicable, the party below it in the contractual chain; or
  • if, within 45 days from the date of receipt, the client does not respond to representations from the worker, or deemed employer, disagreeing with the client’s opinion. Note that the client’s response must include its reasons for either sticking to, or overturning, its original decision.

Lastly, the above liabilities are subject to fraudulent document provisions. This basically passes the liability to the provider of the fraudulent document. This would result in the gross payment incorrectly being made.

What now?

Clients and their advisors should confirm whether the legislation applies to their operation. They should identify where workers’ services are provided via intermediaries. Clients should put procedures in place for reviewing engagements and issuing SDSs. They should also invest time in ensuring they have an adequate appeals procedure in place. This would either internally, or via a suitable external advisor.

Lastly, we have heard of a number of strategies to avoid the new rules. These include personal service companies joining together to form ‘consultancies’. They also include small companies inserting themselves into the contractual chain to provide ‘outsourced services’ to become the client. Bear in mind that during the consultation process, HMRC has made it clear that it is aware of such strategies. HMRC will not be fooled by contrived arrangements intended to circumvent the new rules. These arrangements should not be entered into in haste. An expert Third Party should review your arrangements.

If you have any queries about any aspect of the IR35 Tax Changes please Contact Us Here. We can arrange your FREE consultation.

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