IR35 change puts employers in the spotlight

The Off-Payroll Working Rules, which relate to IR35, are being extended to the private sector next month as part of an HMRC crackdown on disguised employment.

HMRC’s clampdown on Personal Service Companies (PSCs) has received a lot of publicity recently after a string of high-profile celebrity court cases, but now the spotlight is turning to the private sector.

What’s changing?

From 6 April 2020, the Off-Payroll Working Rules (OPW) for the public sector will apply to large and medium-size private employers using PSCs. This change will make these employers or end clients responsible for determining the employment status of workers under IR35, along with any resulting tax and national insurance liabilities. It’s likely that this will result in thousands of contractors being found to be in ‘deemed employment’ as their freelance status is reassessed.

Who is affected?

The new rule will impact medium-large private employers and their contractors where the end client either has 50 or more employees, a turnover of £10m plus, or a bank balance of more than £5.1m.

Whose payroll?

Where contractors are found to be in ‘deemed employment’, there are likely to be three main outcomes, depending on what is negotiated between the parties. The most straightforward is that the contractor ceases to use their PSC and becomes a direct employee of the end client and joins their payroll.

The other options involve the contractor ceasing to use their PSC and managing their payroll through either an umbrella company or agency in the chain. In all cases, the tax and employees NIC will be deducted from the contractor’s fee, and the contractor will effectively bear the additional Employer’s NIC cost through a reduction in their rate with the end client or effectively through fees charged by the umbrella company or agency. It is, therefore, essential for contractors to review their position carefully when being asked to enter into one of these arrangements by their end client.

Timings

Those providing contractor services should be aware that the new rules will apply to payments made on or after 6 April 2020 for services that are provided on or after 6 April 2020. Previously this was determined on when the payment was made rather than when the service was provided. The new rules also apply to contractors working for public sector companies who were excluded from the April 2017 OPW regime previously.

On a positive note, Chancellor Rishi Sunak has stated that businesses and contractors will not be penalised for mistakes made within the first 12 months “except in cases of deliberate non-compliance.”

Best practice

Whether or not the OPW rules apply, all employers should review the status of their contractors regularly. Although HMRC recommends that employers use CEST, which is an online guide to help employers decide whether contractors are genuinely self-employed or not, the reliability of this tool isn’t guaranteed and has received criticism, and hence we always advise clients to seek professional advice when making these assessments.

Directors and office holders

Where directors and office holders are paid by the end client via their limited company, they are within the current IR35 regime and could therefore be affected by the new OPW rules from 6 April 2020. Furthermore, where directors have separate consultancy contracts, there’s an increased risk of being caught by the current IR35 rules, especially following the Petrol Services case, which found in favour of HMRC. Affected PSC’s should review whether office holders genuinely have split roles and collect as much documentation as possible to evidence this but there is still a good chance of HMRC challenge. HMRC determines how IR35 rules apply on a case by case basis and where the new OPW rules apply from 6 April 2020, the engager (or agency etc) may simply take the risk-free approach and decide to apply PAYE and NIC at source for directors.

De-facto directors

Where individuals provide pure consultancy through a PSC and are not appointed as a director (and nor is their limited company), they have a chance of staying outside of the current IR35 and the new OPW rules. However, if they’re essentially acting in the same capacity as a director for the end client (albeit not appointed at Companies House), they are potentially still at risk.

For further information and advice on any of the issues raised, please contact Jon Miles on 01225 325580, or email jm@richardsonswift.co.uk.