In Part 1 of my riveting two-parter concerning IR35, we delved into the fascinating history of IR35 and the zeitgeist which led to its implementation; namely: dirty tax dodgers. In this Second Act, we’ll be looking ahead at the upcoming and, some would say, overdue reforms that are coming into effect in April 2020.
Let’s set the scene: the year is 2017 and the burden for assessing whether IR35 applies to a contract and then also for paying tax - PAYE and employees’ and employers’ NIC - was on the personal service companies (or PSCs). Then comes April of the same year and new rules were introduced that shifted the responsibility for deciding whether IR35 applies to a contract, and therefore the payment of tax, from the PSC to the engager when the engager is a public sector body (or PSB).
This was a start in relieving some of the pressure felt by those hit by the new and confusing regulations prior to this. But fast forward to today and the aforementioned reforms are about to come into play. Under these new rules, if your business uses workers who engage with their own companies (aka PCSs) these new reforms require you and your business to determine their employment status and, in some cases, operate PAYE as required.
These rules will apply to all engaging organisations in the public sector, but only to medium and large engaging businesses outside of the public sector. The only ones who are exempt are self-employed businesses who engage other workers.
But what does this all mean? Well, where these new rules apply, the organisation, third party or agency paying the worker’s company will need to deduct income tax and NICs as if they were directly employed by the company. Right, let’s all drink a stiff cup of coffee because the next part is pretty dull, but it explains the ins and outs of these proposed reforms in more detail:
“Where the individual works for a medium or large-sized engager outside of the public sector, through their own personal service company (PSC) and they fall within the rules:
the party paying the worker’s PSC (the fee-payer) is treated as an employer for the purposes of income tax and Class 1 NICs.
the amount paid to the worker’s intermediary for the worker’s services is deemed to be a payment of employment income or of earnings for Class 1 National Insurance contributions for that worker.
the party paying the worker’s intermediary (the ‘fee-payer’) is liable for secondary class 1 NICs and must deduct tax and NICs from the payments they make to the worker’s intermediary in respect of the services of the worker.
the person deemed to be the employer for tax purposes is obliged to remit payments to HMRC and to send HMRC information about the payments using RTI.”
Everyone still awake? Good! What’s the message we take away? That’s right - take that you pesky tax dodgers. Well… that may be a bit harsh in light of the fact that HMRC have estimated that 120,000 contractors will be affected and that 90% of those will have their income dropped. BUT HMRC have also estimated that these new measures, between 2020 and 2024 alone, will bring in £3.1bn in additional revenue for the Exchequer.
Ah it’s a modern-day Robin Hood isn’t it? Steal from the rich to give to the poor. Whichever side you land on this moral conundrum, it is sure to shake things up, and although it may be a blow to many, the long-term benefit will be widespread in time.