On July 11th 2019, the government published draft legislation for the Finance Bill 2019/2020 that will extend the current IR35 ‘off payroll’ reform 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 key differences in the new legislation from the public sector changes implemented in 2017, is the additional responsibility on the end client to determine the IR35 status of each engagement and the new proposals will apply to private sector and third sector engagements for Medium and Large businesses only.
The new legislation will not be applied to ‘small’ companies (as classified by the Companies Act (2006) as they are exempt; therefore, the decision will remain with the PSC to consider whether their engagement is caught within IR35. However, for those companies who are not exempt then the new laws will apply.
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.
For PSC workers, they must obtain a status determination statement (SDS) from the End Client who decides whether the engagement falls inside IR35. As well as being passed to the PSC, this must also be handed down the supply chain until it reaches the Fee-payer. The Fee Payer is the party liable for ensuring the correct tax treatment is applied and, if not the PSC, is typically the party closest to the PSC (e.g. the recruitment agency.)
The PSC worker can object to the SDS determination and End Client has a 45 day period to respond to the objection. 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.
Once a decision has been made, the Fee Payer is responsible to ensure that PSCs deemed outside IR35 will receive a gross payment; whereas PSCs now caught by IR35 legislation will be paid their income NET (subject to PAYE) into their company.
Becoming a deemed employee and subject to PAYE and NIC (including Employers NI) on earnings could have significant impact on the PSC workers cash flow. In addition to the costs being impacted by being taxed in the same manner as employees, they will also lose the ability to claim some wider business expenses for tax purposes. This could also have a bearing on their company accounting, book keeping, VAT and other statutory requirements.
Although the government have largely ignored the majority of concerns already raised in the initial stages of consultation, they have committed to improve their CEST (check employment status for tax) tool by next year and providing further advice over the summer of 2019.
If you are concerned on how this proposed new legislation may affect your PSC, and what you can do to prepare for April 2020 then please contact Wilder Coe on 0207 748 6060 or contact us at firstname.lastname@example.org. We can offer assistance with IR35 contract reviews and the appeal process, accounting support and taxation advice for your company.