The Government’s current consultation on off-payroll working in the private sector confirms that the public sector off-payroll working rules (otherwise known as “IR35”) will be extended to medium and large sized private sector businesses from 6 April 2020. The potential impact of these new rules should not be underestimated.
The original IR35 rules were introduced with effect from 6 April 2000 and can apply where an individual (a worker) personally provides their services through an intermediary to an end-user. The intermediary is commonly the worker’s personal service company. The use of the term worker here does not mean they have statutory “worker” status for employment rights purposes.
The purpose of the IR35 rules is to ensure that the correct amount of income tax and National Insurance Contributions (“NIC”) are paid under PAYE where the individual personally providing the services via their intermediary works like an employee.
In the private sector the obligation to assess whether IR35 applies, and to operate IR35 when it does apply, has always fallen to the worker’s intermediary. But from 6 April 2020 there will be a significant change:
Medium and large sized end-users of such workers’ services will be responsible for determining whether IR35 applies. This will involve the end-user undertaking a (potentially complex) status assessment to identify whether the worker personally providing the services via their intermediary is working like an employee; and
Where that assessment undertaken by the end-user reveals that IR35 applies, the fee payer (being the party which pays the worker’s intermediary), which could be the end-user or another party, will be responsible for operating and accounting for the related income tax, employees’ and employer’s NIC, and Apprenticeship Levy to HMRC under PAYE.
Furthermore, under proposals set out in the consultation, the end user of such a worker’s services will be required to provide their IR35 determination (and on request, the reasons for it) to the worker and (if different) the party they contract with (for example, a recruitment agency).
What is an end-user?
The term “end-user” refers to the entity receiving the service which the off-payroll worker personally provides.
The current public sector IR35 rules include a fully contracted-out service exception and this exception is expected to form part of the private sector IR35 rules from 6 April 2020.
Under this exception, a party that is provided with a fully contracted-out service by another party, in circumstances where the workers who help deliver that service do not personally provide services to the recipient, is not treated as an end-user for these purposes and should not need to make an IR35 determination.
Where the recipient of the fully contracted out service is not an end-user, the provider could be considered an end-user if, to deliver it, they engage and receive the services of workers who personally provide those services to the provider through their own intermediaries.
In determining whether someone is an end-user it will therefore be necessary to consider whether they have been provided with a fully contracted out service which qualifies for the exception, or the personal service of workers.
In practice it might not always be straightforward to identify whether a fully-contracted out service has been provided and who the end-user is. It is hoped that guidance will be published alongside the draft legislation.
What is a medium or large sized end-user?
A small end-user will not need to apply these new IR35 rules from 6 April 2020. Where the end-user is small it is expected that the obligation to consider and apply IR35 will remain with the worker’s intermediary. For this purpose, a corporate end-user will be regarded as small if it has two or more of the following features:
A turnover of £10.2m or less
A balance sheet total of £5.1m or less; and/or
50 employees or less.
There are, however, some additional points to note:
A different definition of ‘small’, which has not yet been finalised, may apply to a non-corporate end user.
When an end-user becomes, or ceases to be small in an accounting period, it is expected that this change will apply from the start of the tax year following the end of that accounting period. This could prove problematic for end-users whose accounting period ends on 31 March.
Companies in small groups (as defined by the Companies Act) will also qualify as small for the purpose of these new rules.
Anti-avoidance provisions may be introduced to ensure that parties connected to, associated with, or controlled by the end-user cannot take advantage of the provisions to exclude small end-users.
Will this change in the rules only affect medium or large sized end-users?
This change in the IR35 rules will also impact other parties who are involved in supplying workers operating through their own intermediaries to medium and large sized end-users. This may particularly impact recruitment sector businesses involved in such labour supply chains.
It will be necessary for such businesses to deal with the IR35 determination they receive (which might be directly from the end-user or another business in the labour supply chain) in the appropriate way. The intention is that all recipients of the status determination will be legally obliged to either:
Pass that IR35 determination to the next party in the chain; or
If the recipient of the IR35 determination is the party which pays the worker’s intermediary (i.e. the fee payer), and it is determined that IR35 applies, that party must then operate IR35. This means calculating a deemed payment of employment income and accounting for and paying the related employment tax, employees’ and employer’s NIC, and Apprenticeship Levy to HMRC via PAYE.
Importantly the consultation proposes that the liability for the tax, NIC, and Apprenticeship Levy due under IR35 should initially rest with the party that has failed to meet its obligations.Furthermore, there could be further rules that determine when that liability can be transferred to another party in the case of default by another party.
It is important that businesses affected by these rules are fully aware of their obligations and consider protection against unexpected liabilities arising as a result of a default by another party in the chain.
What should businesses potentially affected do next?
The steps which businesses should take will depend on whether they are an end-user or another party which is involved in supplying such workers to medium and large sized end-users. Actions steps could include:
Setting up an internal focus group to prepare for the introduction of these rules
Establishing whether the small business exemption for end-users applies
Assessing current and new arrangements to determine those which could potentially be caught by these rules
Reviewing arrangements involving complex labour supply chains to determine if these are likely to increase risks from 6 April 2020
Explaining the changes to the workers who operate via intermediaries such as PSCs
Assessing the direct and indirect financial impact of the proposed changes, and the new procedures and processes which may need to be implemented to deal with them.