IR35 in the private sector

January 3, 2020

With heavily anticipated changes to IR35 tax rules coming into force in April 2020, UNW employment taxes partner Lee Muter offers insight into what this means for employers

What is IR35?

IR35 is a piece of anti-avoidance tax legislation that was introduced by the Government in 2000. It applies where an employer engages a worker through a personal business, referred to as a personal service company (PSC).

Why was it considered tax avoidance?

Employers who engaged workers by paying their PSC instead of directly didn’t need to pay Employer’s National Insurance or deduct tax and National Insurance Contribution (NIC) from the payments made to the worker. As the worker would then obtain the payments from their business in what was perceived by HMRC as a more ‘tax-efficient manner’, it was argued that this arrangement avoided tax and NIC.

What is changing in April 2020?

Original IR35 rules put the onus on the worker to determine if they were an employee. New IR35 rules were introduced in April 2017 to the public sector, placing responsibility on the engaging organisation to decide employment status rather than the individual. In 2018, it was announced that these rules would be extended to the private sector from April 6, 2020, meaning medium and large businesses will be liable for deciding the employment status of individuals they are engaged with through PSCs. If agreed that the worker is an employee, employers should add them to their payroll as a ‘deemed employee’ and deduct the relevant tax and employees’ NIC from any payments and pay any employers’ NIC to HMRC. If agencies supply workers, the employer must ensure any status decision is passed to the agency, as the responsibility for paying the tax and NIC may be with them.

How do you determine whether a worker is an employee or not?

There are three main tests: control, personal service requirements, and ‘mutuality of obligation’ – which is controversial as HMRC dispute the meaning of this test. Factors including length of service, the degree of integration into the engaging business, and whether the worker supplies their own equipment for work should also be considered.

Is there a specific tool to help decide employment status?

HMRC has developed its online Check Employment Status for Tax (CEST) tool, which is available for workers to use. However, CEST has been widely criticised for not following established case law in coming to formal decisions.

Are there any exemptions?

The new rules only apply to medium and large businesses and larger non-corporates, such as charities and professional services firms. Small businesses that meet existing Company Law definitions are exempt from the changes. Public sector organisations operating the legislation since April 2017 will also have to implement some additional rules relating to issuing a Status Determination Schedule (SDS) and implement a dispute resolution process. Failure to comply will lead to significant extra tax liabilities for employers.

What do employers need to do now?

Employers must identify any workers currently not on their payroll and consider, on a case-by-case basis, whether they should be deemed as an employee. Payroll processes must be changed to cope with the new rules, and a process for taking on new workers after April 2020 should be established. Finally, it’s important employers introduce a dispute resolution process for situations where workers disagree with decisions about their status.

UNW
If you have any questions or have any concerns about how IR35 changes might affect you, contact Lee Muter on 0191 243 6089 or at leemuter@unw.co.uk
www.unw.co.uk

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