On 11 July 2019 HMRC published the tax rules that will apply to off-payroll working between contractors and their medium-sized and large organisation clients in the private sector from 6 April 2020. These rules which are often referred to as IR35 because HMRC’s guidance on working through an intermediary has that title. The rules have applied in the public sector since April 2017 and will make the private sector fee-paying organisation and not the contractor responsible for deciding if the contractor or his personal service company (“PSC”) through whom he provides his services should be treated as if he were an employee for PAYE and NIC purposes and if so, for deducting the tax and NIC arising. The rules applying the changes to the private sector will be included in the Finance Bill 2019 and where the individual contractor concerned works in effect like an employee, the person paying the worker or his PSC must treat the contractor or his PSC as though they were an employee and the payer was their employer and deduct tax and NIC from the payments made and account for them to HMRC. The off-payroll worker will be legally required to provide their National Insurance Number, tax code and identity details to enable the correct tax to be deducted. On or before the fee-payer makes a payment to the worker or to his PSC, the 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. Firms that are classed as “small” organisations will not be affected by the new rules and will not need to decide the employment status of the off-payroll contractors whom they hire or to operate IR35. When the private sector client organisation is “small” the contractor or his PSC will remain responsible to HMRC for correctly deciding their own IR35 status and the fee payer will not be required to decide this. In order to decide whether the client will qualify as ‘small” 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 firms 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.
There are anti-avoidance rules relating to joint ventures whose members together are not “small”, to “small” companies that are subsidiaries of parent companies that are not “small” and the annual turnover of “connected” persons must be added to an organisation’s turnover to determine whether it qualifies as “small”. In the case of a firm that is not a company the criteria listed above are also applied to determine whether it is “small”.
These rules will in some cases be difficult to apply especially in cases where the client organisation is part of a group or is “connected” with other firms so that their respective turnovers need to be aggregated and care needs to be taken to avoid mistakes either way. Deciding that a client organisation is not “small” when it meets the necessary criteria for “smallness” may lead to unnecessary tax and NIC deductions and be off-putting for skilled contractors who are genuinely self-employed. Worse still will be mistakenly deciding that a client organisation is “small” when it is not for example by failing to take into account the turnover of firms ‘connected” with the client. In such cases paying fees to the contractor on a gross basis without deduction of PAYE and NIC will risk an HMRC enquiry or investigation coupled with the associated time and cost of dealing with HMRC and the resultant tax assessments and penalty charges.
HMRC offer an online tool called Check for Employment Status for Tax or CEST to help clients decide if PAYE and NIC should be applied to the fees paid to the a contractor or his PSC.
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 and NIC. 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 to firms in the private sector from April 2020 or could use help drafting the contractual documents.
This article was provided by Patrick Cannon, a leading SDLT and tax appeals barrister. 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.