IR35 or the “off-payroll working rules” as they are known are intended by HMRC to make individuals who work like employees pay broadly the same (higher) employment taxes as if they were actually employees, even if legally speaking they perform their services as self-employed consultants and as such would pay lower amounts of tax and national insurance contributions (“NIC”). The off-payroll working rules apply where an individual (the “Worker”) provides their services through an intermediary to another person or entity (the “Client”). The intermediary in this case can be another individual, a partnership, an unincorporated association or a company. The most common structure is a personal services company (a “PSC”) owned by the Worker concerned.
In April 2017, the government beefed-up the rules by making public authorities responsible for deciding whether the Worker should be treated as if they were an employee even though they had not been hired directly. This public sector reform also made the public authority or agency Client that pays fees to the Worker’s PSC, responsible for accounting for and paying income tax and NICs under PAYE to HMRC, on behalf of the Worker.
From April, 2020 these IR35 rules will be extended to Workers in the private sector.
From April 2020 when the IR35 rules apply, the private sector Client paying fees to the PSC will be treated as the employer for income tax, NICs and Apprenticeship Levy purposes. The fees paid to the PSC will be treated as if they were in fact a payment of the Worker’s employment income when they are paid. The amount treated as the off-payroll Worker’s employment income will be the VAT exclusive amount paid to the worker’s PSC. For income tax, NICs and Apprenticeship Levy purposes, the Worker will be treated as having an employment with the fee-payer. This will require the Client fee-payer to operate the rules for tax, NICs, and the Apprenticeship Levy in the same way as for a normal employee. The off-payroll Worker will be legally required to provide their National Insurance Number, tax code and identity details to enable the right tax to be deducted. On or before the Client fee-payer makes a payment to the worker’s PSC, the Client fee-payer will have to complete the normal Real Time Information (RTI) process and notify HMRC of the amount of the taxable earnings and the tax and NICs deducted.
Yes. Clients that are classed as “small” organisations will not be affected by the reform and will not need to decide the status of the off-payroll workers they hire and operate IR35. They will need to use the existing statutory definition within the Companies Act to determine whether or not a corporate client is small. This definition is in section 382 of the Companies Act 2006 and provides the Companies Act definition of “qualifying as small”. The qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements —
The reform will apply to all corporates who do not qualify as small under the test set out in section 382 (including those small companies which are excluded from qualifying as small despite meeting the requirements). Companies in small groups as defined by section 383 of the Companies Act will also qualify as small for the purposes of the April 2020 changes.
As with the public sector IR35 rules, if the fee-payer is offshore, the liability to operate the IR35 rules moves to the next person in the contractual chain who is in the UK. Where a party in the contractual chain, including the Client is outside the UK but the off-payroll Worker performs services in the UK, fee-payers must still deduct tax and NICs. There are provisions that are intended to prevent the Worker’s PSC from manipulating the labour supply chain in order to avoid IR35.
HMRC offer an on-line tool called Check for Employment Status for Tax or CEST to help Clients decide if PAYE should be applied to the fees paid to the Worker’s PSC. One of the crucial tests for genuine self-employment status is whether or not the PSC has the right to substitute another worker to fulfil the obligations under the contract between the PSC and the Client.
It seems that CEST fails to reflect many previous tax tribunal decisions on whether a Worker is genuinely self-employed or a disguised employee and as such subject to PAYE. Worse still when the information regarding the TV presenter Lorraine Kelly was put into CEST it said that she was really an employee, contrary to the clear decision of the tax tribunal.
Therefore, please be careful when using HMRC’s CEST tool and seek professional legal advice if you are unsure about IR35 off-payroll working and how it will apply in the private sector or could use help drafting the contractual documents.
This article was provided by Patrick Cannon. Patrick advises on and appears in civil and criminal tax disputes with HMRC, challenges to tax avoidance schemes and action against professional and other advisers who mis-sold aggressive tax avoidance schemes now subject to APNs and Follower Notices.