Off-Payroll Working Rules in Private Sector
The plan to launch the off-payroll working rules in private sector (www.gov.uk) has been confirmed by HMRC. The rules will be effective from 6th April 2020 and affects the contracting industry as a whole – large and medium sized businesses, agencies and contractors working through an intermediary.
The consultation on the proposal to introduce the rules was launched by HMRC earlier this year. HMRC received a number of responses from the industry experts, advising on the catastrophic effects it will have on the flexible work force. In spite of the heavy criticism, the draft legislation published in July-19 to enact the Finance Bill 2019-20 did include the extension of the off-payroll working rules to the private sector. The rules are similar to the changes that were introduced in the public sector in April-2017.
What Are the New Off-Payroll Working Rules?
In summary, the off-payroll working rules shift the responsibility of determining the IR35 status from the contractor’s intermediary to the end-client.
The new rules also state that if the status is deemed inside IR35, then the fee payer needs to deduct PAYE taxes before paying the contractor’s intermediary.
Who is Subject to the New Working rules?
The new rules extend the scope of off-payroll working to all contractors providing their services to medium and large size organisations. This means contractors providing services to smaller businesses are exempt for now from the rules.
The Companies Act 2006, defines large and medium size companies as those who meet any two out of the below three tests:
Where the end-client meets two or more of these criteria, they are responsible for determining the IR35 status of the contractor.
For organisations that are not companies for example LLP, Partnerships or Sole traders, then just the turnover test will be used
The rules continue to apply as they are to the public sector organisations, with no small company exemption.
What is the Status Determination Statement (SDS)?
The draft legislation states that the end-client must advise the contractors on the IR35 decision made on their contract with reasons – by issuing an SDS. The SDS must be provided to the contractor and the agency (if there is one in the chain) responsible for making the payments.
The contractor can raise a dispute about the SDS directly with the end client, a mechanism which the end-client is required to provide. The end-client then needs to write to the contractor within 45 days from the day the dispute is raised, advising on the outcome of the review of the dispute.
The review must confirm whether the original decision is upheld or if the determination is changed, the end-client should issue a new SDS to the agency and the contractor.
What Happens if the Off-Payroll Working Rules Apply?
If the rules apply, the end client determines the IR35 status on each contract. If the contractor is adjudged inside IR35, then 100% of income is subject to PAYE before receipt by their limited company
Please note similar to the off-payroll working rules in public sector, the draft legislation removes the 5% deduction available to the PSCs to meet the costs of running a company.
If the off-payroll rules do not apply, meaning the contractor is working for a small-client, they will continue to determine their own status and if assessed inside, they can still benefit from the 5% allowance.
Retrospective investigations from HMRC?
In their briefing notes, HMRC have made it clear the rules will apply from 6th April 2020 and a new enquiry into earlier years will only be opened if they suspect fraud or criminal behaviour. Although this is a welcome move the statement is vague and cannot be relied upon as it is still unclear as to what would happen if the contractor haven’t previously complied with the rules correctly. It is recommended that contractors keep a record of how they arrived at their IR35 status for the previous years before the new rules were introduced.
What is HMRC’s CEST?
HMRC have released a Check Employment Status Tool (CEST) for use in determining IR35 status. They further recognis there are flaws in the CEST and have committed to its improvement. We recommend using other tools along with CEST to determine IR35 status, because in recent court cases HMRC have regraded the results from CEST as irrelevant.
Please download a copy of our off-payroll guide for more information on the off-payroll rules.