From April 2020, large and medium-sized businesses will take over responsibility for determining whether workers hired through an intermediary should be treated as an employee for tax purposes or not.
The new rules form part of major push by the government to tidy up the rather confused and murky set of employment and tax regulations known as IR35. Relating to so-called ‘off payroll workers’, IR35 was actually introduced as far back 2000, based on the broad principle that people who work for a company under similar conditions should be taxed in the same way.
What IR35 was targeted at was the practice of contractors, often operating as their own limited companies, being hired to do work under conditions that to all intents and purposes resembled employment. This includes things like being contracted to work a fixed number of hours per week, being obliged to work from a specific location, being provided equipment such as company laptops and phones to carry out the job and so on.
In HMRC’s view, such practices are an abuse of the self-employment tax regime, as it allowed contractors to pay much less in Income Tax and NIC than someone employed directly by the company, but for doing more or less the same work. It also frees companies from making their own contributions, or adding people to their PAYE system.
Realising that it was missing out on huge sums of tax revenue, the government set out to, as it saw it, level the playing field. But it handed responsibility for determining whether off payroll workers qualified as ‘surrogate employees’ or as genuine contractors to personal service companies (PSCs) and other intermediaries responsible for helping self-employed personnel find work. With the definitions between what counts as self-employed or not at best lacking clarity, the majority of agents have simply not registered their clients for PAYE in spite of the rules.
The government has estimated that, by 2023/24, this failure to enforce IR35 regulations would cost the exchequer £1.3bn in what it sees as due Income Tax and NIC revenue.
Following a major shake up of how IR35 was administered for public sector organisations in 2017, the government is now set to extend the new regime to all companies that don’t count as ‘small’ under the Companies Act 2006 – i.e. those that have an annual turnover of more than £10.2m, a balance sheet of more than £5.1m or employ more than 50 employees. Small businesses are excluded from the rules on the grounds that the administrative burden created would be disproportionately damaging.
The key change is that, from 6 April 2020, responsibility for determining whether a contractor qualifies as an employee under IR35 regulations or not will be ‘passed up the line’, with the buck ultimately stopping with the company a contractor is doing the work for. That means companies themselves will be expected to carry out an employment status determination for any worker taken on through and agency or directly on a non-employment contract.
The intention is to prevent companies, PSCs and contractors effectively acting in collusion to reduce their tax liabilities – under the new rules, there is a greater shared responsibility for ascertaining whether conditions of work meet the benchmark for employment, and subsequently following PAYE procedures if so. Income Tax and NIC must be paid via PAYE by whoever pays fees to the worker, be it the company they are working for directly or an intermediary they have a contract with.
There remain concerns, however, over the extent of the grey area that exists between the working definitions of employment and legitimate self-employed/contractor status. It is anticipated that the need to carry out an employment status determination for every contractor will create considerable workloads and costs for companies, and that determinations are likely to lead to disputes with contractors and agencies. The government’s advice in such cases is that the parties involved are best placed to resolve such matters.
To find out more about how the new IR35 rules are likely to affect your company and to get advice on how to prepare for them, contact a member of our Payroll and Tax teams.