The government announced in 2018’s Budget that businesses will become responsible for assessing the employment status of the off-payroll (commonly known as IR35) workers they engage.
From 6 April 2020, medium and large businesses will need to decide whether individuals who work through their own company fall inside or outside of IR35.
Where the worker is inside IR35, the business, agency, or third party paying the worker’s company will need to deduct income tax and employee National Insurance (NI) and pay employer NI.
This article highlights what a recruiter needs to know about existing IR35 legislation and what the proposed changes mean for the private sector.
What is IR35?
The off-payroll working rules – commonly known as IR35 – are intended to ensure that individuals who work like employees pay broadly the same employment taxes as employees, regardless of the structure they work through.
The off-payroll working rules apply where an individual (the worker) provides their services through an intermediary to another person or entity (the client).
HMRC refers to such workers as ‘disguised employees’ as the worker doesn’t meet HMRC’s definition of self-employment, therefore, the correct tax and NI isn’t paid correctly.
Note: ‘worker(s)’ = freelancer / contractor
IR35 and the Public Sector
In April 2017, the responsibility for determining whether a PSC worker is inside or outside of scope of IR35 legislation was shifted to the hiring organisation. This included liability for tax and national insurance contributions.
Public authorities impacted include:
- Government departments and their executive agencies
- many companies owned or controlled by the public sector
- schools and universities
- local authorities
What was the impact?
HMRC’s Off-Payroll Reform in the Public Sector report, released in 2018 found:
- 58% of central bodies and 70% of sites said that there was no change in the ability to fill contract vacancies post April 6 2017.
- Most public bodies reported that their ability to fill contract vacancies had not changed.
- Most central bodies and sites had not found it any more difficult to recruit off payroll contractors with the appropriate skills or knowledge (central bodies: 68%, sites: 76%) or find off-payroll contractors willing to work for them (central bodies: 62%, sites: 67%).
- 38% of public bodies used HMRC’s CEST / ESS tool as a source of information for determining IR35 status. Of these, 22% said that the tool was either “not very helpful” or “not at all helpful”.
- 60% of central bodies reported that their staff spend more time on administration since the changes.
Proposed changes to IR35 in the Private Sector, 2020
The Government’s objective is to increase compliance in the private sector with rules that have been in place since 2000, to make sure that they operate as intended.
The proposed changes to IR35 will impact businesses in the recruitment sector who supply workers operating through intermediaries, such as PSCs, as well as medium and end user clients who use the services of ‘off-payroll’ workers.
- To increase compliance with the existing off-payroll working rules in the private sector. HMRC estimates that it will lose £1.3bn in tax revenue by 2023/24 if IR35 rules are not changed.
- To bring the private sector in line with the public sector.
Who is impacted by the change:
- Recruitment agencies who supply workers operating through intermediaries, such as PSCs
- Medium to large businesses who are using the services of ‘off payroll’ workers.
- The worker
Key areas of the proposed change
- From 6 April, 2020, the responsibility for assessing whether IR35 applies will shift from the individual to the end client, recruitment agency or another third party engaging with the worker.
- The new rules will only apply to ‘medium and large businesses’. The criteria is expected to be similar to the definition in the Companies Act 2006 which stipulates “the qualifying conditions are met by a company in a year in which it satisfies two or more of the following requirements:”
- Turnover not more than £10.2 million;
- Balance sheet not more than £5.1 million; and
- No more than 50 employees
Note: The Companies Act definition doesn’t apply to unincorporated businesses. HMRC suggests two options – to apply the reform to “unincorporated entities with 50 or more employees and to entities with turnover exceeding £10.2 million” or “to apply the reform only to unincorporated entities that have both 50 or more employees and turnover in excess of £10.2 million.” While it falls on clients to know whether they’re a small organisation, questions have been raised around when workers should be told they’re working for one.
- The government has announced that small organisations will be exempt from the changes proposed for April 2020. Meaning that workers engaged in contracts with ‘small businesses’ will remain responsible for determining IR35 and not the client. HMRC confirmed in their March 2019 consultation that this will remain the case even if the worker is hired via a recruitment agency.
- For workers whose assignments will fall inside IR35, PAYE and NI contributions will need to be deducted at source from their income by the ‘fee payer’ (agency or end client).
- The end client is advised to communicate to the worker the IR35 status of their assignment.
Determining IR35 status
IR35 decisions are based on but not limited to:
- Mutuality of obligation
- Personal service
- Direction and control from the client
- Treated as a permanent employee of that organisation
HMRC has developed the Check Employment Status for Tax (CEST) service to help businesses determine whether the off-payroll working rules apply.
What recruitment agencies should do in preparation for 2020 proposed changes to IR35 in the private sector
- Assess current arrangements for each client, identifying the number of workers supplied who operate via ‘off-payroll’ status – e.g. PSCs.
- Determine if the off-payroll rules apply for any contracts that will extend beyond April 2020.
- Start talking to your contractors about whether the off-payroll rules apply to their role.
- Put processes in place to determine if the off-payroll rules apply to future engagements. These might include who in your organisation should make a determination and how payments will be made to contractors within the off-payroll rules.
- Assess arrangements involving complex labour supply chains to identify if your position post April 6 2020 will increase your payment risk.
- Identify how many clients are outside the new rules through not meeting the criteria to be classified as a ‘medium and large business’.
- Develop a training and communications strategy to ensure your team can explain changes to IR35 to workers who are ‘inside’ or ‘outside’ the legislation.
- Assess the direct / indirect financial impact of IR35.
- Review internal systems, such as payroll software, process maps, HR and onboarding policies to see if they need to make any changes
A summary of responses will be published later this year by HMRC. The consultation will inform the draft Finance Bill legislation, which is expected to be published in Summer 2019. The reform will come into force from 6 April 2020.
Specialist advice can be sought from a variety of tax, legislation and employment experts including: