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Changes to the taxation of workers

Changes to the taxation of workers providing services through an intermediary (also known as ‘off-payroll working’ or ‘IR35’) are due to take effect from 6th April 2020.

Under current rules applicable to private sector organisations, the onus is on the intermediary, usually a personal service company (‘PSC’) to self-assess whether IR35 applies and if an individual worker is a ‘deemed employee’ for that purpose. From 6th April 2017, responsibility for assessing engagements with PSCs working in the public sector shifted to the public-sector end user.

Draft legislation was published by the Government on the 11th July 2019 confirming a further extension of IR35 reforms to large and medium sized businesses in the private sector with a start date of 6th April 2020.

There is some uncertainty whether the proposed changes will come into force in April 2020 due to the general election. At the time of press, the three main political parties have announced that they will review the Government’s planned extension of the IR35 legislation.

What you need to know

  • the new rules need to be applied when a worker is personally providing services to an end-user via its own intermediary (usually a PSC) and the end-user is either a public sector end-user or a medium or large sized private sector end-user.
  • The off-payroll worker obligations will not operate in relation to “small” companies and “small groups” of companies as defined by the Companies Act. The same tests will apply for Limited Liability Partnerships.
  • To be a small business requires two of three tests to be met:
    • Turnover of £10.7 million or less;
    • Gross assets of less than £5.1 million;
    • 50 employees or less
  • The end user must analyse the profile of the worker’s intermediary and will need to assess whether the worker would be deemed to be an employee if (ignoring the intermediary) they were providing their services directly under a hypothetical contract to the end user.
  • Terms and conditions, working arrangements and other status indicators which have evolved over time from case law must be considered to determine whether a contract is one of employment or self-employment.
  • The end user must confirm the IR35 status of a contract by providing a ‘Status Determination Statement’ (SDS) to the off-payroll worker in writing.
  • The new rules can apply where the end user sources off-payroll workers via recruitment agencies and other third parties. In such cases, the end user will need to provide a SDS for each off-payroll worker and provide this to both the agency/third party and the worker.
  • The proposed legislation is designed to ensure the organisation with responsibility for issuing the SDS, or the fee-payer if an Agency is involved, is responsible for any employment tax liabilities arising. Where the end-user determines that the worker would be deemed an employee, the fee payer will need to account for tax and NICs under PAYE when paying the worker’s intermediary.

How can we help?

All arrangements with individual contractors should now be reviewed.

In addition to determining whether PAYE and NIC obligations will arise from 6 April 2020, consideration must be given to changing existing arrangements with contractors, i.e.  engaging contractors as employees or ending contracts early.

The basis on which the IR35 rules are determined is a legal test, which if met deems an individual for tax purposes to be treated as an employee and this impacts on HR and payroll processes.

To discuss this article, or for further advice, please contact the Tax & Private Client team on 01274 350 800 or email law@schofieldsweeney.co.uk 

About the Author

John Feaster

Partner

John Feaster, LLB, CTA, TEP is taxation partner. He qualified as a tax lawyer with Eversheds LLP specialising…

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