IR35 private sector (guide to changing pay slips) Immigration

Changes to the IR35 rules on the hiring of contractors or off-site workers through intermediaries will be extended to the private sector with effect from April 6, 2020.

Below we examine the nature and extent of the IR35 changes in 2020 and how employers in the private sector should prepare for the new requirements for outside employment.

What are the IR35 changes as of April 2020?

As of April 6, 2020, IR35 tax reforms will come into effect, aimed at improving compliance with existing rules for non-professional work in the private and third sectors, including voluntary and municipal organizations such as registered charities and self-help groups.

Typically referred to as IR35, the amendments to these rules already apply to public sector organizations that use the services of contractors or outside workers through intermediaries.

Under the expanded regime, all medium and large organizations outside the public sector, as well as government agencies and other public bodies, will be responsible for determining the IR35 employment status of those who work for them, for example through their own limited company Liability.

The net effect of the IR35 2020 Amendments is that if it is determined that the IR35 rules actually apply, that person’s employer deduction of the correct tax and National Insurance Contributions (NICs) instead of tax is required the employee’s agent decides which deductions are to be made.

Why are the accounting rules being reformed?

When using the services of contractual partners and external employees, it is common for companies to deal with an individual through an intermediary and not directly with the employee on an independent basis. The agent is usually the employee’s Personal Service Company (PSC), but it can also be a partnership or a managed service company.

However, the IR35 work rules for off-site activities provide that a person who works in the same way as an employee and, if contracted directly, would be considered by the PSC to be an employee of the incorporating company is similar Pay taxes to other employees.

The IR35 rules were introduced back in 2000 because it is only justified that two people who work in the same way for a company generally pay the same income tax and NIC, even if one of them works through a company ,

As such, the main objective of the work rules for unpaid employees is to remove the tax advantages of providing services through a limited liability company for people who are not really doing business on their own account. This essentially means that anyone who works like an employee but acts through an intermediary will continue to pay the same or similar taxes and NICs as an equivalent employee.

In order to find out whether the IR35 labor rules apply to non-earnings related benefits, a person or organization has to make a decision as to whether an individual employee is employed or self-employed for tax reasons. This is commonly referred to as IR35 employment status assessment.

In 2017, the UK government changed the rules for non-company employment for public sector employees hiring through PSCs and other intermediaries. The reform shifted responsibility for determining IR35 employment status from the employee’s PSC to the public sector agency or other public agency they work for.

As such, all public sector organizations are already responsible for determining the employment status of a contractor or an outside worker and whether the IR35 rules apply to that person.

However, in the 2018 autumn budget, the UK government announced plans to implement similar reforms for the private and third sectors, while giving companies time to adjust and prepare. Extending the rules would adapt these economic sectors to changes in the public sector and ensure consistency and compliance across the labor market.

Under current regulations, organizations outside the public sector are responsible for determining this status through their PSC or other intermediary, rather than the incorporating company, and may recognize taxes and NICs.

However, this is the problem that has led to the reform push, namely that the mediator essentially has to judge for himself whether the regulations are applicable. As a result, the IR35 rules were largely ineffective, as HMRC estimates that only one in ten people should currently comply with the rules for non-company employment in the private sector.

It is also estimated that the cost of non-compliance with the UK rules is expected to be GBP 1.3 billion per year until 2023/24 if IR35 non-professional rules are not properly applied.

Status determination after April 2020

Considering that under IR35 rules in force, contractors and outside workers are essentially responsible for determining their own IR35 employment status if the risk of non-compliance lies with them or their brokers once the IR35 rules for the private sector are in Enter force, These transfer responsibility to the committed company.

In other words, the organization responsible for hiring the contractor or the off-site worker is responsible for determining the IR35 tax status of the person concerned and determining whether the IR35 rules apply.

There is no strict test that needs to be used to determine whether a person is a worker or not. However, employers should consider the following questions:

  • How much control does the employer have over the individual, what he does and how he does it? The more autonomy the individual has, the more likely they are to be considered independent.
  • Does the individual have to do the job personally, or could he hire someone to do the job? If someone else can do the job, it is more likely to be a self-employed activity.
  • Is the person obliged to take on the job and is the employer obliged to offer the person work? If there is no obligation, this is generally considered a self-employed activity.

After this evaluation, the organization must inform the person concerned and / or agency about the evaluation result. If the subcontractor is considered an employee, the organization is responsible for the taxes and social security contributions

If an obligation falls under the work rules for unpaid employees, the organization, agency or other third party responsible for paying the employee’s company is also responsible for deducting taxes and NICs through Pay As You Earn (PAYE) to bring in addition to all of the employer’s NICs. As such, the contractor’s business is taxed at source as if it were an employee.

Ultimately, this means that responsibility for performing employment status assessments falls within the responsibility of the company or body that uses the services of the contractor or the off-site worker, i.e. H. the “end customer”, while responsibility for operating PAYE and paying the employer’s NICs rests with the agency that pays the PSC, d. H. the “fee payer”.

Which employers are affected by the IR35 changes?

Until April 6, 2020, the rules for IR35 apply only to the public sector. From this date, the rules also apply to the private sector, including charities. Organizations must meet 2 of the following 3 conditions:

1. Annual sales in excess of £ 10.2m.
2. A balance sheet of more than £ 5.1 million.
3. More than 50 employees.

Who is not affected by the IR35 changes?

It is important to remember that the upcoming reforms will not introduce new taxes, but will change the way in which taxes are levied when a contractor or off-site worker falls within the scope of IR35 and is considered taxable. These changes are intended to promote compliance with applicable regulations and ensure that those affected will pay the correct tax in the future.

Accordingly, the changes in the private sector of IR35 will not prevent individual contractors from working through their own limited liability companies, nor will the changes affect the self-employed who are outside the scope of the rules.

The new rules for outside employment only apply to people who work like employees and through a company, while the self-employed who work through a PSC or other intermediary continue to be taxed as they are now. In addition, an estimated two-thirds of the people currently working in a company are truly self-employed and will not be affected by these changes.

Likewise, the changes in the rules for off-site billing will not affect the smallest 1.5 million companies in the UK. Therefore, small private sector companies do not have to decide on the employment status of their contractors or off-site workers if this remains the responsibility of the employee’s intermediary.

Who is classified as a medium or large organization?

Under the reforms, a company is classified as a medium or large company if it meets two or more of the following conditions:

  • It has annual sales in excess of £ 10.2 million
  • It has total assets of £ 5.1m or more
  • It has more than 50 employees.

The balance sheet total refers to the total amount that is shown as assets in the balance sheet before liabilities are deducted.

However, a simplified test applies to companies with an annual turnover of more than £ 10.2m that are not a company, limited partnership, unregistered company or foreign company.

There are also rules for affiliates and associates. If the parent company of a group is classified as medium or large, its subsidiaries must also apply IR35 private sector labor rules for off-site activities.

If you meet the above requirements or are otherwise within the scope of a medium or large organization, you will need to start applying the rules when the changes take effect on April 6, 2020. However, it is important to take this into account. The size requirements only apply to end customers, where small fee payers are still responsible for applying the work rules outside of payroll.

Compliance with IR35 rules for the private sector

For medium-sized or large private sector companies that work with multiple contractors or off-site workers through PSCs, the impact on costs and the operational challenge of being operational by April 2020 is likely to be significant.

Needless to say, you need to take action to prepare for it, not least to assess the potential financial and operational impact on your business and to implement changes that minimize the impact of the new rules.

In particular, the changes in the private sector of the IR35 can lead to an increase in the operating costs of your company, either directly as a fee payer or indirectly as an end customer, as these in the value chain seek to increase their fees to reduce tax increases and NIC obligations.

However, the cost implications of the new rules are expected to go well beyond the higher fees, taking into account the potentially significant costs of managing the change and introducing new processes to ensure that this is done effectively.

In accordance with government recommendations, to prepare for all aspects of the IR35 private sector changes, you must identify the key process steps and decisions that must be taken to effectively manage the change. In particular, you must:

  • Identify and review current commitments with agents, including PSCs and employment agencies, and whether the labor rules for non-earnings related services apply to contracts going beyond April 2020
  • After you have identified your PSC population, perform a comprehensive risk assessment to determine your exposure to IR35 and to check whether changes to HR and procurement processes are required when working with contractors on PSCs
  • If necessary, design new internal processes and controls to manage the operational impact of the changes, including payroll software, process mappings, and personnel and entry guidelines
  • Think about what contract changes are required and communicate with PSCs and all agencies to support the required transition
  • Establish processes to determine whether the rules for off-site billing apply to future contracts with contractors and off-site employees, including deciding who in your organization should make that decision and how to make payments to contractors that fall within the scope of the rules
  • Consider the impact on costs and how you can manage and reduce additional social security costs for your business.

Once the new regulations come into force, companies can expect HMRC to review their compliance thoroughly. It is critical that you have appropriate internal systems and processes in place as soon as possible.

What must companies do after April 6, 2020?

After April 6, 2020, all medium and large organizations outside the public sector will be responsible for deciding the IR35 employment status of contractors and off-site workers for tax purposes.

This inevitably involves an evaluation process for each contract that you agree with an agency or individual employee through their PSC. In particular, you need to do the following:

  • Determine the employment status of the worker
  • Give reasons for the determination to the employee and the person or organization with whom you have contracted
  • Keep detailed records of the status of employment, including the reasons for the decision and the fees paid
  • Use clear processes to resolve any disagreements that may arise from your determination.

How to determine a person’s employment status

There is no precise legal test to determine whether a person should be treated as an employee for tax purposes, but the test is based on a number of different factors. However, the HMRC has taken various measures to help companies and other organizations correctly determine their status.

In some cases, this includes individual support and direct communication as well as workshops, online learning and an extended online tool. The Tax Status Checking Tool (CEST) was specifically designed to help companies determine whether the work rules apply to unpaid benefits.

After you make your assessment, you must notify the employee and the agency or other organization with which you have a contract, regardless of whether or not your decision provides for the IR35 work rules to be applied to unpaid employees. This is called a status assessment statement (SDS).

In addition, the safety data sheet must include not only the decision on the status of the employed person, but also the reason for this conclusion. You will also remain liable for taxes and NICs until you communicate your determination and the reasons for this to the employee and the contractor.

It is important to keep in mind that if you find that engagement is outside IR35, you must ensure that reasonable care has been taken during the decision-making process and that the determination itself is appropriate. If you do not exercise reasonable care, your decision will be invalid and you will be held liable for unpaid taxes.

Keep records of your destination

As an affected medium-sized or large organization, the new changes in the private sector of IR35 can have significant tax implications. For this reason, it is important that you keep clear and accurate records of your IR35 employment status requirements and your reasons for making these decisions.

If you find that the contractor or outside worker is employed for tax purposes, your company or the agency through which the contractor was hired must pay the required taxes and NICs before paying the contractor.

On the other hand, if you find that the person concerned is self-employed, they remain responsible for fulfilling their own tax obligations. The new rules do not apply if there is real independence or a consultancy relationship.

Dealing with disagreements about a determination

In cases where the contractor or off-site employee or the agency that pays the employee’s agent does not agree with the determination you have made, you must have a dispute resolution process in place.

In particular, as part of your status differences, you should do the following:

  • Rethink the determination of employment status based on the reasons why you disagree with your original determination, including any other information provided
  • Decide whether you want to keep the original determination if you think it is correct and justify it, or alternatively provide a new determination that you agree was wrong
  • Keep a record of your decision and the reasons for it, as well as a record of the declarations made to you by the worker or agency that pays the agent.

You must respond within 45 days of receiving notification that the employee and / or agency disagrees with your IR35 employment status determination. In the meantime, you should continue to apply the rules according to your original purpose.

If you do not review your decision within 45 days and give a reasoned answer, assume responsibility for the employee’s IR35 tax and NIC liability in lieu of the employee or an agency.

Can PSCs still be used after the April 2020 IR35 changes?

Regardless of the shift in responsibility for determining the employment status of IR35, which will make hiring contractors and external workers less attractive to medium to large companies to which IR35 applies, the new regime will not prevent anyone from engaging an intermediary if this suits them or from companies that work with people who continue to go through a PSC.

Using a PSC can be beneficial for both the individual contractor and the company wishing to use its services. In particular, the status of a limited liability company protects the employee against any claims against him, while the use of PSC offers more flexibility for companies, especially if it works in a sector with fluctuating labor requirements.

By working with contractors through PSCs, organizations can also achieve significant cost savings that do not give them legal employment rights, such as sickness and vacation benefits, just because they provide a service.

In other words, although the individual worker affected by the new measures may have to pay taxes like an employee, their employment status does not change, so they do not receive the rights and benefits associated with employment.

Need support?

It is important for organizations in the private sector to prepare for the upcoming changes. It is important to note that employment status is always assessed on a case by case basis. It is advisable to conduct the assessment before April 6, 2020 to ensure compliance from the date of implementation.

DavidsonMorris lawyers are available to assist employers with the new requirements, taking into account your existing PSC population, any future non-tariff employment, and the processes you currently have.

IR 35 Private Sector Rules: FAQs

What is the new IR35 legislation?

As of April 2020, companies will be responsible for determining whether the payroll companies they hire are subject to income tax and social security contributions, and in this case, to pay the amounts to HMRC in accordance with the changes to IR35.

Which companies are affected by the change to the IR35 rule?

The IR35 rules are extended to medium-sized and large private sector employers, including nonprofits. Organizations must meet two of the following three conditions: they have annual sales in excess of £ 10.2 million; a balance sheet of more than £ 5.1 million; more than 50 employees. If the conditions are met, the organization is responsible for determining employee status for those referred to as subcontractors.

What if a subcontractor disagrees with the employer’s determination?

If a subcontractor disagrees, the organization must examine the reasons for the mismatch and decide whether there is a reason to change the original decision. The organization must then send a detailed response to the person concerned and record the decision within 45 days.

How DavidsonMorris can help.

DavidsonMorris lawyers advise you on the development and implementation of employment status systems to ensure compliance with new regulations.

Last updated: January 30, 2020

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