From 6 April 2020, a major shake-up of the off-payroll (IR35) rules is expected. Draft legislation has already been published, though final details and HMRC guidance are still to come.
The new regime will affect you if you work via your own personal service company (PSC). Off-payroll workers should be aware that their clients are likely to investigate the profile of the contractor workforce more closely than before, as part of a general review of compliance, strategy and spend. However, the changes could be felt more widely. Anyone supplying personal services via an ‘intermediary’ could be within the scope of the IR35 rules. An intermediary can be an individual, a partnership, an unincorporated association or a company.
Will you be affected?
The change could impact you if you supply personal services to large and medium organisations in the private and voluntary sector. If the client is a ‘small’ business, the rules are unchanged. A company is considered ‘small’ if it meets two of these criteria:
• its turnover is not more than £10.2 million
• it has not more than £5.1 million on its balance sheet
• it has 50 or fewer employees.
If your contract is with an unincorporated organisation, the new rules only apply if its annual turnover is more than £10.2 million.
Determining employment status
Under the new rules, responsibility for making the decision as to whether IR35 rules apply passes to the business you contract for. The key question is whether, if your services were provided directly to that business, you would then be regarded as an employee. You may be used to this if you undertake contracts in the public sector, where similar provisions already exist. HMRC has an online ‘check employment status check tool’ (CEST), which can be found at www.gov.uk/guidance/check-employment-status-for-tax, and undertakes to stand by the results if information provided is accurate, and given in good faith. It can be used by you or your client, although, at present, HMRC considers it is unable to determine status in 15% of cases. Many commentators consider the failure rate to be much higher. HMRC is working to improve the CEST tool with the forthcoming changes in mind.
In the future, your client will have to give you the reasons for its status decision in a ‘Status Determination Statement’ (SDS). If you disagree, you can challenge the status determination with the business, and it should respond within 45 days, either withdrawing or upholding the decision, again supplying reasons.
Looking to the future
Significant tax implications arise if IR35 applies, as the business or agency paying you will calculate a ‘deemed payment’ based on the fees charged by your PSC. Broadly, this means you are taxed like an employee, receiving payment after deduction of Pay as You Earn (PAYE) and employee national insurance contributions (NICs). If you operate via a PSC, the PSC will receive the net amount, which you can then receive without further payment of PAYE or NICs. The potential tax advantages of working under such a contract – especially for PSCs – are much reduced.
This is a good time to take stock of your options. Are clients likely to query your employment status? Should you consider restructured work arrangements, or renegotiating fees? If working via a PSC, is it still the best business model? With clients checking that contracts comply with the new rules, employment status for contractors is likely to come under increasing scrutiny across the board.
We would be delighted to talk through your options and the tax consequences. For those working only for small private sector clients where contracts do not fall under IR35, we are always happy to review your profit extraction strategy. Please do get in touch on 0161 761 5231 or email firstname.lastname@example.org.