The Proposed Changes in Private Sector IR35 Rules

Although long-pending, in the United Kingdom, HM Revenue & Customs (HMRC) has warned businesses to avoid any kind of stay in the preparation for changes to the off-payroll working rules.

What is IR35?

HMRC (Her Majesty's Revenue and Customs) introduced IR35 legislation in April 2000 to fight tax evasion. The legislation is intended for all contractors who are not 'self-employment' according to the definition of HMRC and it is applicable for every employee in the UK working through some intermediaries like a partnership or a company.

There is an understanding in the government that there is a huge disappointment amidst people about the IR35. It is regarded as a bad law by the expert tax advisors and most of the businesses, which is misinterpreted and mismanaged by HMRC.

Also Read: IR35 Checklist

Government of UK reformed the public sector off-payroll working rules in April 2017. In 2018, HMRC arranged talks with various parties to understand the best ways to address the disappointment with IR35.

Changes Proposed in Private Sector IR35

On 5th March 2019, new discussions were held, the intention of which was to take feedbacks from concerned people on some sections of proposals that is scheduled to be effective from April 6th, 2020.

Private sector customers can begin to determine the employment status of their staff and further communicate it using the public sector directions. Additionally, those paying the fee (this is for the firms that pay for their employees’ intermediaries) will have to constitute the income tax and NICs of the employee’s and employer’s.

What are the Reform Scopes?

The companies that are large and medium in size, that are mainly defined for Companies Act purposes – will get affected due to reforms. They will also require regulating the status of every off-payroll staff they involve in the process.

HMRC intends to find out a simpler process to introduce almost similar non-corporate private-sector units within the ambit of reforms. Their intention is to confirm that there will be consistency in the implementation of the reforms that will be applied to complete series of units and structures operational in the private sector.

The organisations that are smaller in size or part of small groups will not be affected by the reforms, hence there will be no requirement to decide the off-payroll workers’ status, whom they engage in their process.

You should be aware of the fact that, the company is identified as small in any financial year if meets two or more of the requirements discussed here. The yearly turnover of a small company should not exceed £10.2 million; and balance sheet total, should not exceed £5.1 million; and besides these two, a small company should not have more than 50 employees.

What all Information Needed that are proposed in IR35 ?

Most probably, the existing rules of the public sector will be adopted by the reforms that are proposed in IR35. However, little improvement or modification is possible.

It is expected, client has to offer the determination for every engagement and if there is a request, they also must provide the reasons for it, all these straight to the workers of off-payroll. Every singe receiver of this kind of information will need to forward it to the next person in the contractual chain, till the time it finally in the hands of the fee-payer.

HMRC is looking for information about a certain type of labour supply chains from various sectors. It is also interested in exploring alternate processes of short-circuiting a long supply chain, the one that would let the fee-payer take the determination straight from the client.

Also Read: IR35 Off Payroll Working Rules

When there is non-compliance, the income tax and NICs liability will primarily remain with the party that is unsuccessful in fulfilling its obligations, till the time it meets the obligations. In labour supply chain then the liability to keep moving down as every single party meets its obligations. With this, HMRC is of the view that these processes would encourage people to work with only trustworthy and compliant companies.

In a place where a small private sector company involves an off-payroll worker, it will not require to decide if the involvement is within IR35. As an alternative, off-payroll worker and their intermediaries will be accountable (as it is currently) for determining if IR35 is applicable.

Defining the Status of Employment

According to HMRC the off-payroll working rules should be applied correctly and reliably, depending on the information of every single engagement. The status of employment tax is defined by the agreement terms and conditions and the real working experience of the person engaged.

The consultation of 2018 raised concern on the response received that was regarding the absence of a method that challenges the status determinations, and it is also sceptical of the fact that the companies would decide on blanket determinations of the status of employment of their multiple off-payroll workers who are involved in the parallel roles.

There is a two-stage solution suggested by HMRC. Firstly, make the existing rules stronger that will require the client to provide the off-payroll and fee payer, the purpose for their status determination, on request. Secondly, a method led by clients to let off-payroll workers and fee-payers to contest the determination of status.

According to HMRC belief, they are confident that these preparations will confirm that the customers are very responsible and are reasonably careful while deciding on the final viewpoint on the status determination of every engagement. Hence, lesser off-payroll workers will require to apply end-of-year methods to contest the determination of the status.

There are some apprehensions that online tool ‘Check Employment Status for Tax’ (CEST) of HMRC is incapable of taking exact case law interpretation that required in determining employment status, and it is also inept to manage the complexity of the private sector.

HMRC is seeking to improve the CEST service and also, work on the correlated guidance so that the engaged companies can use them confidently to make determinations of employment status determinations those can be trusted. It is still not clear if this process can be accomplished.

Let’s Know What are the other Characteristics of IR35

The reforms to IR35 in private sector might have been followed in the reforms made in 2017 very carefully for public-sector firms.

Also Read: IR35 off Payroll Public Sector Worker

In places IR35 is applicable, the fee-payer must work on real time information (RTI) for tax, NICs and the apprenticeship levy in a way that is similar for an employee. Due to the processed reforms, statutory payments and other privileges of employment will remain unaffected.

All employer NICs whose payments are made as an effect of deemed employment salary under IR35 will have liabilities that are left out for the reason of the employment allowance. However, the fee-payer won’t need to deduct to solve the purpose of student loans.

Following the April 2020 reforms, the current provisions that deals with double taxation will continue to be applicable.

The intermediary of workers will not be allowed for 5% standard deductions in perspective to engagement with medium and large sized clients.

The anti-avoidance provisions that exists today will continue to be applicable. Let say, wherever the agency or third party that might be the offshore fee-payer, the accountability shifts to the very next person in the UK in the chain of agreements. Only if the client is from the UK, they will be accountable.

To avert abuse of the provisions which would eliminate small clients from private sector from the reforms, the government can even consider introducing other anti-avoidance measures.

There are special facilities that deal with services that are contractual and other tax legislation. HMRC is also considering governmental alternatives to let fee-payers contribute, those will not only be tax free but also NICs-free. These contributions will be made to personal pensions of off-payroll workers.

Also See: Limited Company Formation

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.