OFF-PAYROLL WORKING (IR35)

What does it mean to me as a contractor?

A summary guide

It has been widely publicised that the government plans to introduce new legislation from April 2020 that seeks to address the perceived avoidance of income tax and national insurance contributions (“NIC”) by off-payroll workers in the private sector.

Commonly known as the “IR35” regulations, the changes will apply to medium and large private sector businesses that engage workers through intermediaries. The new rules will not affect small businesses that engage off payroll workers with the current rules still applying. The definition of an intermediary is wide ranging and can include personal service companies (“PSC”), partnerships (including LLPs), managed service companies and even an individual.

The fundamental rules on whether a worker will be subject to these new regulations has not changed. It has and will still remain a question of whether the relationship is one of employment or self-employment, based on the way the worker provides their services.

The major change relates to which party is required to make the decision on whether the worker should be subject to the off-payroll regime and who is responsible for deducting the relevant income tax and NIC.

This document has been prepared by Roffe Swayne Accountants and it is a summary of Roffe Swayne’s understanding of the draft legislation and guidance which has been published with regard to the proposed introduction of the new off-payroll working rules.

These rules are due to start on 6 April 2020 but the final legislation has not yet been published. Further guidance will be issued when the final legislation is released. You should ensure that you take full professional advice in advance if you are, or are likely to, be affected by these rules.

We include a comparative example and some frequently asked questions which may assist you when considering these proposed new rules.

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Summary of the changes

Until now the decision and responsibility for confirming with the IR35 regulations has been with the worker/PSC. This will change under the new regulations in April 2020, with the decision making moving to the client or end user and the responsibility of deducting the income tax and NIC moving to the fee payer.

The changes may also affect the contractor prior to this if the current or new contract is due to extend beyond April 2020. It should be noted no tax/NIC deductions will be required until after April 2020.

In simple terms the definition of each of these are:

• Client/end user – organisation who ultimately receives the services

• Fee payer – generally will be an agency, but can be a PSC, who makes the payment to the worker

• Worker – individual/PSC who is required to provide the services

The client will need to determine if the worker would be an employee if they had been engaged directly.

The client will need to document the reasons why they have reached their decision and provide a Status Determination Statement (“SDS”) to the organisation who supplied the worker, usually an agency or the PSC and direct to the worker.

If the client determines that the IR35 rules should apply, the fee payer is required to account for the necessary income tax and NIC deductions, before paying the net amount to the worker.

There can be multi-levels of agencies within a complex supply chain and it should be noted that it is the agency which pays the worker who will be responsible for the income tax and NIC deductions.

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Examples

It is possible for the same role to be undertaken by both a self-employed and employed worker. It will be how the worker provides their services that will determine whether they are an employee or not.

Below we consider the role of an accountant and whether they should be an employee or not.

The above example provides a clear distinction between the ways services are provided and it is easy to determine the status of the worker. It is clearly more difficult if there is a mixture of each of the factors highlighted.

Employed contractor Self-employed contractor

Required to undertake specific tasks as determined by the employer

Required to work on specific projects as agreed with clients

Contracted to work 7 hours per day and every week Works the required hours when they want to ensure project is delivered on time

Uses company supplied computer and software Supplies own computer and software

Works from company offices only Works from home or company offices as they wish

Undertakes all work personally Can pass work to other suitably qualified individuals

Work carried out under direct supervision of managers/directors

Results presented to client at agreed intervals

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Frequently asked questions

When do the new rules regarding off-payroll working come into effect?The new rules are due to start in April 2020 although the final legislation has yet to be published and will be included in the Finance Bill for 2019. The publication of the Finance Bill has been delayed due to the impending general election, but we expect this to be issued early in the new year with these new rules still taking effect from April 2020.

Who is responsible for determining the status of a worker under the new rules?The client or end user will need to determine the status of the worker. This will be the organisation which receives the services from the individual.

Example : Ascot Limited engages with and pays PSC Limited to provide the services of Mr Worker. Ascot Limited is the client and will need to make the decision and issue an SDS to PSC Limited and the worker.

What is the definition of a medium or large organisation for IR35 purposes?It depends on whether the organisation is a corporate or a non-corporate entity. The regulations use the company act definition and a company is medium/large if it meets two or more of the criteria below. A non-corporate just needs to meet the Turnover test:

1. Turnover - more than £10.2 million2. Balance sheet total - more than £5.1 million3. Average number of employees - more than 50

Do the new rules only apply to companies?No, any organisation that engages workers through intermediaries.

Can I still use a personal service company for my business activities?Yes, but you will pay tax and national insurance on any contracts that are deemed to be within these regulations. It should be noted that multiple contracts could be an indicator that you are in business and therefore not within the off-payroll regulations.

If my contract is deemed to be within IR35 do I become an employee of the client or have to operate on an FTC basis?No, IR35 regulations only apply to income tax and NIC. You will not be an employee of the company and will not be entitled to any of other benefits as an employee. The regulations only stipulate that income tax and NIC should be deducted from any payments made by the client relating to that contract.

Can I appeal the result of an SDS if I disagree with the decision?If you do not agree with the SDS you can challenge the decision with the client. There is no formal appeals process with HMRC, so ultimately the client needs to agree the worker’s challenge to change the decision.

If a client uses the HMRC’s Check Employment Status Tool (“CEST”), will HMRC be bound by the result?If the test result indicates that the worked is not within an employee, HMRC have stated that they will be bound by the outcome of the CEST, unless a subsequent compliance check finds the information provided when the client completed the CEST was incorrect. Therefore, you will continue to receive gross payments.

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If a client uses the HMRC’s Check Employment Status Tool (“CEST”), will the relief be bound by the result?A client can use the CEST on a no-name basis or just as an indicator so will not be bound by the result if the CEST indicates that the interim should be treated as an employee. However, we believe that some clients will use these results to counter any challenges made by workers to the SDS issued.

If as a worker I am affected by the new rules and suffer income tax and NIC on my income, will I also pay corporation tax on my profits?No, there will not be any double taxation. HMRC have stated that any net income received by a company that has already been subject to income tax/NIC will not be taxable in the company. How this is practically accounted for in the company if the company has other income is still under review.

Will I be able to deduct any expenses from the invoices or will income tax and NIC be payable on the full amount?Income tax and NIC will only be deducted from the actual “pay” which will be the gross invoice minus VAT and any expenses which would be allowable as employee expenses. These will usually be materials and travel and subsistence.

What happens if a role is incorrectly classified and this is subsequently brought to light by HMRC?The legal obligation to deduct income tax and NIC lies with the fee payer. However, the SDS is issued by the client. If the fee payer does not deduct the income tax and NIC due to it not receiving a SDS or receiving an incorrect SDS then the liability ultimately falls on the client. If the fee payer fails to account for income tax and NIC having received the SDS then the liability falls on the fee payer.

Will there be retrospective analysis of IR35 status?HMRC have stated that these are new regulations and they will not use them to revisit historical positions retrospectively.

What should I do if my current contract runs beyond 6th April 2020 or if I’m offered one which runs beyond that date?We would suggest that all contracts that run beyond 6 April 2020 are reviewed to consider what impact the new regulations will have on your position. We would suggest discussing the position with your clients to understand how they will be dealing with the proposed changes.

What happens if the client is classified as small?If the contract is with a small client then the new rules relating to off-payroll working do not apply.