From 5 April 2020, the IR35 regime currently applicable to public authorities will be extended to all medium and large private sector entities.
A review will be undertaken in February to gather evidence from affected individuals and businesses in order to determine whether any further steps can be taken to ensure the smooth and successful implementation of the reforms.
What are the new IR35 rules?
The new rules ultimately mean that employers will now be responsible for determining the employment status of independent contractors in relation to tax, with, the potential to become liable to account for that tax themselves if they fail to do so.
It is proposed that the tax treatment of those providing work in the private sector be brought in line with the system currently in place for the public sector, whereby it is the end-user's responsibility to determine the appropriate tax treatment for that individual. Where the worker falls within the scope of the new rules, end users will then be required to collect income tax and national insurance contributions through PAYE in the same way as they do for employees.
Who must comply with IR35?
All end-users will be required to apply the new IR35 rules unless they qualify as "small" companies. For this purpose, a private company is considered small if it is registered entity which satisfies two or more of the following requirements:
- Its annual turnover is not more than £10.2 million.
- Its balance sheet total is not more than £5.1 million.
- It has not more than 50 employees.
What are the IR35 Obligations?
Where IR35 applies, the end-user must determine the employment status for tax purposes, of those working through an intermediary, such as a personal services company.
Where an end-user is procuring the services of an individual through an intermediary, it will be required to:
- Produce a Status Determination Statement to communicate its determination of employment status and the reason for that determination to the individual or organisation with whom it contracts;
- Make sure it keeps detailed records of employment status determinations, including the reasons for the determination and nay fees paid; and
- have processes in place to deal with any disagreements that arise from determinations, as workers and intermediaries have a right to appeal the determination.
How can you prepare?
- Review all contracts with workers through intermediaries which will commence or continue on or after 6 April 2020.
- In respect for services provided on or after that date, determine employment status and ensure that processes are in place for completing determinations in a timely manner for all future engagements.
- You should prepare for the increased administration burden created by the IR35 in addition to the potential tax implications for the organisation.
- Arrange for the necessary documentation to be produced in preparation for the changes, include;
- Notices of assessment to existing workers;
- Status determination; and
- Letters providing notice of the outcome of a dispute.
End-users should also put in place processes to manage challenges to status determinations.
This is not legal advice; it is intended to provide information of general interest about current legal issues.