Are you prepared for the IR35 changes?
In April 2020, the off-payroll working rules (commonly known as “IR35”) will be reformed. This will have key implications for businesses.
The IR35 rules were introduced in 2000. In very broad terms, they ensure that where an individual (a contractor) provides services through an intermediary (such as a personal services company) to an end user client, if the contractor is in fact working like an employee, he/she will pay broadly the same tax as if he/she were an employee. In essence, the IR35 rules therefore prevent personal service companies being used to get around the payment of employment taxes.
Under the current IR35 rules, it is the individual who must determine whether the IR35 rules apply and it is the personal services company that must pay any tax due.
Last year, in light of an increasing concern that the IR35 rules were not working, the government consulted on proposed changes for the private sector (with similar changes having been introduced in the public sector back in April 2017).
It is expected that the amended IR35 rules will come into force on 6 April 2020.
The proposed changes mean that the end user client will now be responsible for determining whether the IR35 rules apply and for paying any tax and NICs on the sums due to the personal service company.
This will put a potentially significant tax liability on businesses who engage contractors through personal services companies.
It is likely that contractors will demand higher fees in order to recoup the tax that is deducted from their fee. Alternatively, individuals may argue that they are in fact employees (or workers) and that they are entitled to employment rights and certain payments (for example, holiday pay and pension entitlements).
Note that the changes will have no impact on individuals who are genuinely self-employed. The government tool “Check for Employment Status Test” (“CEST”) (which can be found here) can assist businesses in determining whether an individual is genuinely self-employed.
There are some important steps that your business can take now in order to prepare for the changes:
- Audit your contractor arrangements
- Consider how your business will prepare for the changes
- Budget for the changes
- Negotiate with your contractors at an early stage
- Seek legal advice to help minimise any risks
The government is currently consulting on some of the details of the changes. The consultation ends on 28 May 2019 and can be found here should you wish to respond.
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. This update relates to the prevailing circumstances at the date of its original publication and may not have been updated to reflect subsequent developments. If you have general queries about our updates, please email: email@example.com