HMRC has published draft IR35 regulations (to come into effect on 6 April 2020) and a summary of the responses received during the consultation process.
Properly known as the off-payroll working rules, IR35 was introduced in 2000. In 2017 the rules were significantly amended by requiring public sector bodies to deduct tax at source if an individual contractor working through a personal service company is considered to be essentially an employee. That requirement is now being extended to all medium and large organisations from 6 April 2020.
With the draft legislation and consultation response paper, HMRC has provided additional information on how the extension will operate. This includes:
A simplified scope test for unincorporated organisations
The government consulted on which test it should use to determine whether an unincorporated organisation is a medium-sized organisation (so within scope of the rules) or small (and so not subject to them). It has decided to focus solely on turnover, so an unincorporated organisation will be medium sized if its turnover exceeds £10.2 million in a calendar year. This is a different approach to incorporated companies for which turnover is one of three tests and the company would only cease being small if it meets the criteria for two consecutive years.
Clarifying how long an unincorporated company has to comply once it becomes in scope
Unincorporated organisations will have to operate the new IR35 rules from the start of the tax year following the filing date at which they ceased to qualify as small i.e. their turnover exceeded the £10.2 million threshold. This preparation time will be welcome news for employers, albeit that it is arguably not as long as applies to companies where the test covers two years.
Clarifying the obligations of entities within a supply chain
The draft legislation introduces an obligation on the client to pass its status determination and reasons for that determination to the next entity in the supply chain (which will often be a personal service company or an agency) as well as to the workers themselves. In addition, where there are several entities in the chain, they must each pass the determination to the next in that chain.
The government confirmed that liability for non-compliance could transfer back up a supply chain from the non-complying entity to the first agency and ultimately the client. However, as part of the consultation process, the government recognised that supply chains can be complex and stated that further guidance on when entities would not be pursued for liabilities would be published.
This transferable liability will make due diligence on a supply chain increasingly important for organisations caught by the IR35 rules.
Introduce a disagreement process
The draft legislation introduces a disagreement process. HMRC will legislate to set out minimum requirements for the disagreement process (which contractors can use if they do not accept the determination) aimed at resolving disputes. Failure to follow these processes will result in the client being the deemed fee-payer and therefore liable to account to HMRC for income tax and national insurance. Developing a robust appeals process will therefore be a priority for organisations caught within the IR35 rules.