On July 11th 2019, the government published draft legislation for the Finance Bill 2019/2020 that will extend the current IR35 ‘off payroll’ reform in the Public Sector to the Private Sector from 6th April 2020. The UK’s current IR35 legislation ensures that two people working side by side in similar roles for the same end client, should pay the same employment taxes.
The proposed implementation of the new IR35 in April 2020 will be similar to the public sector changes we saw in 2017, however the new proposals will apply to private sector and third sector engagements for Medium and Large businesses only. As classified by the Companies Act (2006), ‘small’ companies will be exempt from the new legislation. To qualify, the business is defined to have two out of the following three (Section 382(3)):
- A turnover less than £10.2million
- A Balance sheet total no more than £5.1million
- Less than 50 employees
The new legislation will not need to be considered by clients who fall into this category, as it remains the decision of the PSC (personal service company) to consider whether the arrangement is caught within IR35. However, for end clients who are not exempt then the new laws will apply. The legislation does also provide measures to ensure that subsidiaries and associated companies are not able to take advantage of the small companies’ definition for exemption.
The two key parties involved are the “End Client – Decision Maker” and the “Fee Payer”.
It will be the End Clients responsibility to ensure that a Status Determination Statement (SDS) is produced, which provides a written statement on whether IR35 applies to the engagement. However, if the End Client doesn’t take ‘reasonable care’ to reach this decision, such as taking a ‘blanket approach’ to a group of positions, then the statement may not be valid. There are consequences, such as penalties and PAYE liabilities, to End Clients who fail to prove that they have taken reasonable measures.
Once an SDS has been produced, this must be passed to the PSC, and to any parties directly below in the contractual chain. Any agencies that are involved in the supply chain must continue to pass the SDS on, otherwise they will be potentially liable as the Fee Payer, until it reaches the final party in the chain (above the PSC). It is then the responsibility of the Fee Payer to ensure the relevant Tax and NI (including Employers NIC) deductions are made, before paying the PSC.
It is possible for the PSC worker to raise objections to the SDS determination, and the end client has a 45 day period to respond. There are no current legislative guidelines for the process, however if the End Client disagrees with the challenge, then they must provide the PSC with the reasoning of its decision. Alternatively, the End Client can re-issue a new SDS along with updated reasoning. If a response is not provided during the 45 day timeframe by the End Client, it will then hold the position of the Fee Payer for legislative purposes.
The intended legislation also has the provision, via amendments to the PAYE regulations, for the Fee Payer to seek recovery of any unpaid tax and NI contributions from any “relevant person” – any party who is involved in the arrangement of payment to the PSC.
Therefore, if it is not possible for HMRC to recover from the non-compliant first entity in the supply chain then they will hold the highest agency accountable. This is an attempt to incentivise all parties to take relevant measures to reduce non-compliance and make it easier for HMRC to monitor in the future.
It is anticipated that the changes will impact approximately 170,000 individuals working through their own company, as well as 60,000 organisations that use workers employed by a PSC. Although the government have largely ignored the majority of concerns already raised in the initial stage of consultation, they have committed to improve their CEST (check employment status for tax) tool and providing further advice over the summer of 2019.
If you think you and your business may be affected by the impending changes, then please get in touch with Wilder Coe on 0207 784 60 60 or contact us online email@example.com. We will be able to provide you with independent advice and assist your company in preparation for April 2020.