Beating the IR35 clock
IR35, the so-called intermediaries rules, are notoriously complex and the challenge of understanding them are about to get harder with next year’s and implementation of further changes to the ‘off payroll’ IR35 rules for the private sector.
The off-payroll working rules affect individuals who work as if they are full time employees - but invoice for their services through an intermediary company (typically their own personal service company (PSC)). These are called ‘deemed employees’ by HMRC.
As a deemed (or disguised) employee, the net result is the tax paid is lower because payments via dividends are exempt from NIC. That, says government, is unfair.
IR35 is intended to tackle tax avoidance by contractors who are deemed employees for the purposes of tax efficiency. However, HMRC is in some cases seeing not so much tax efficiencies but tax avoidance – and it does not like it. Not surprisingly, it is taking action to salvage the tax it is effectively losing.
What’s changing?
While recognising that many such arrangements are entirely genuine and will remain unaffected by IR35, there are others which have been created as an artificial method by which employers can avoid paying NIC. HMRC wants contractors to pay the correct and fair amount. Similar rules were introduced in 2017 for the public sector and will be extended to the private sector from April 2020.
HMRC will apply an employment test looking at the individual’s actual working practices rather than what the paperwork says. If an individual is working via their own limited company but are effectively doing the same work as an employee – for example, they are effectively working permanently and full-time – they will be liable for the same amount of tax as an equivalent employee.
It’s vital for businesses to get to grips with the impending changes, particularly those who will be directly or indirect affected – namely, contractors, entrepreneurs, freelancers and limited companies. The financial cost could be significant and a lack of awareness of the impending changes could cause you problems with HMRC.
What does this mean?
Private contractors and companies will be directly affected by the changes from next April. The responsibility will then be on large and medium sized companies (the end-users) to assess IR35 rather than the contractor as under the current framework. If the end-user decides IR35 does apply,
it will be the end user itself (or other relevant fee payer) who must account for and pay the related tax and NIC to HMRC – including the additional income tax and employer’s NIC. Note that the new rules will not apply to small company end users.
But what if the end-user either fails to pay the full amount due, or makes the wrong determination under IR35? HMRC can then treat the end-client (the PSC, for instance) or any other relevant party in the chain of payments liable instead. This means that when the rules bite, the responsibility for compliance passes to the end-user - but shifts back to the end-client or someone else in the chain in the case of non-compliance.
All those with off-payroll arrangements potentially affected by IR35 when it hits the private sector next April must prepare now to ensure they have the appropriate systems and processes in place, and the resources to ensure the correct amounts can be paid to HMRC.
HMRC will take into account various factors such as on what basis the worker is paid; whether the worker is running their own separate business controlling how they manage and complete their workload; who provides any equipment used; and whether there is exclusivity of client.
To help assess whether IR35 applies to existing contracts and new arrangements with contractors, HMRC provides a link to a test which businesses will find invaluable. Expert advice should also be taken to ensure you are ready and compliant with the rules.
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to hear from you