In his 2018 budget speech, the chancellor announced the widely expected changes to the rules on off-payroll working (known as IR35) in the private sector. The move follows reform to the off-payroll working rules in the public sector in April 2017.
At the moment, an individual contractor, who provides his or her services to a private sector client through a personal services company (PSC), is responsible for deciding if the IR35 rules apply to the work he or she carries out. The IR35 rules set parameters for when work will be deemed to be employment and require PSCs to account for tax and national insurance contributions on deemed employment income.
From April 2017, a public sector body or agency engaging a contractor has been responsible for determining if an engagement is deemed employment, rather than the old system of this being the contractor’s responsibility. If the public sector body decides the contractor is an employee for a particular engagement, then the public sector body or agency must deduct tax and national insurance at source.
From April 2020, medium and large businesses engaging contractors will become responsible for determining employment status in the same way as public sector bodies must now do so. The business will also be responsible for operating PAYE if the contractor is deemed to have employee status. The existing rules will continue to apply to small businesses. The criteria for what constitutes a ‘small business’ will be similar to those found in the Companies Act 2006.
HMRC developed an online tool to help public sector bodies assess employment status. Employers do not have to use the tool, but part of its appeal is that HMRC will be bound by its output, unless it is obtained fraudulently. This tool is also available for private sector employers to use and the budget announcement confirmed that HMRC will continue to improve the tool and guidance before the reforms take effect in 2020.
The budget announcement also contained assurances that HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes for the first time once the reforms take effect. HMRC has also promised extensive guidance and support to help businesses apply the new rules.
The legislation which will introduce these changes is due to be published for consultation in summer 2019. While that seems some way off, we recommend that, if you engage a lot of contractors, you start assessing your off-payroll workforce now. It is not too early to start planning and ensuring you have processes in place to comply with the new rules.