Off-payroll workers - IR35 legislation
The Government is proposing changes to the IR35 legislation within the private sector.
At present, where a business (including professional bodies, charities and other not-for-profit organisations) engages an individual via an intermediary, normally a personal service company (PSC), then the PAYE and Class 1 National Insurance compliance obligations rest with the service company.
The Government, through HMRC, has expressed considerable concern over the years about the lack of revenue the IR35 legislation has generated. The first steps to rectify the ineffectiveness of the IR35 legislation started in April 2017 and saw changes within the public sector (as defined by the Freedom of Information Act 2000). The draft legislation applying to the private sector has now been published by the government and will come into effect from 6 April 2020.
A summary of the proposed changes includes:
- The rules will replicate those which already apply to the public sector
- The engager will be responsible for operating the legislation which will apply where the services are provided via an intermediary, typically the worker’s personal service company (PSC) but would otherwise be considered an employee of the engager
- Where the PSC is supplied via an agency, or agency supply chain, the agency closest to the worker in the supply-chain will be responsible for operating PAYE and Class 1 National Insurance on the fees paid
- Workers will no longer be able to claim the 5% deduction for general costs
- Where the engager is deemed to be small the intermediary will retain responsibility for operating the legislation
- For incorporated businesses the Companies Act definitions test will need to be considered to see whether the legislation will apply (see comments below)
- Where the engager is an unincorporated business only the annual turnover test will apply but it will need to be considered on an annual basis, rather than the two-year test which will apply to incorporated businesses
- For both incorporated and unincorporated business where they cease to be regarded as small, the legislation will need to be operated from the beginning of the next tax year.
The test for incorporated businesses
Where two of the following conditions are met during two consecutive accounting periods, the incorporated business will need to operate the off-payroll worker legislation:
Balance sheet total
Number of employees
50 or more
Where a business is caught by the legislation, any payments it makes to intermediaries will need to be considered as part of the Apprenticeship Levy calculation.
Where the legislation is due to apply on payments made to an off-payroll worker the business must:
- Provide the worker and any agency in the supply-chain with details of their decision as to whether the legislation will apply
- The decision which determines whether the worker would be a direct employee of the engager were it not for the presence of the intermediary must be provided within 31 days of the engagement.
Right of appeal
The draft legislation makes provision for the worker's right of appeal against the decision of the business.
The engager must respond within 45 days setting out the reasons why they believe the legislation is applicable or provide confirmation that they have changed their mind and the worker is not caught by the legislation.
The legislation does not provide the right of appeal to HMRC and it will be a matter for the two parties to resolve. However, HMRC will be issuing guidance to help resolve disputes.
Transfer of debt
Where there is a failure by any intermediaries within the labour supply-chain to operate PAYE and Class 1 National Insurance, the legislation provides HMRC with powers to recover any unpaid liabilities from, typically, the first intermediary in the supply-chain.
The Government has stated that the powers are only to be applied in cases of deliberate default or where the arrangement is part of a structured tax avoidance scheme.
Further guidance will be published before 6 April 2020.
What should businesses be doing now?
Businesses should be reviewing their existing worker supplier-chain, reviewing the contractual arrangements in place to see whether the proposed IR35 legislation will apply.
Failure to fully consider the implications of the draft legislation could result in the business facing significant liabilities, not only tax and National Insurance but also interest and penalties.