The recent case of Lorraine Kelly and her working arrangements has brought into focus the Government’s plans to expand the current rules regarding the clamp down on the status of consultants and contractors in the public sector to the private sector. The legislation, known as IR35, was strengthened for the public sector in 2017. The October 2018 Budget brought confirmation that the IR35 changes would come into force for ‘medium’ and ‘large’ private sector businesses from April 2020.
How does IR35 currently work?
Since April 2017, public sector organisations (such as NHS Trusts and the BBC) have been required to examine the arrangements they have with workers who supply their services through intermediaries. This includes agencies, partnerships and personal service companies (PSCs). Where, but for the existence of the intermediary, the arrangement would be one of employment, public sector engagers are required to operate PAYE on all amounts payable to the worker either directly or via an intermediary.
What are the changes?
In short, the changes will push the determination and associated tax liabilities of whether an individual is an employee or self-employed onto ‘the client’. Broadly this is the end user of the individual’s services. This is a substantive shift from the current position and involves a consideration of the status of the individuals whether they are engaged through a company or as an individual.
The current proposals are to include businesses that have at least two of the following characteristics:
• More than 50 employees
• Turnover in excess of £10.2m
• A balance sheet in excess of £5.1m
For businesses that are required to undertake a statutory audit, as they will be responsible for determining the status of their workers, there is an increased risk of incurring additional PAYE, employees and employers’ national insurance if workers are deemed by HMRC to be employees but have not been treated as such. There will also be interest and penalties to pay. Accordingly, self-employed workers deemed to be employees will find their tax liabilities dramatically increased. Getting it right is imperative but potentially quite tricky as identifying the status of some self-employed workers can be a grey area.
How will this impact businesses?
For medium and large businesses, this could impact on the use of off-payroll workers to support things like special projects where project managers, marketing specialists or other consultants are required. It may also impact on the use of flexible workforce solutions and the use of agency workers. This is because the legislation will impact on the arrangements where any intermediary is used to supply off-payroll workers.
It does not apply where the off-payroll worker is genuinely self-employed.
Clearly this change represents an increase in the risk to large private sector businesses who want to engage self-employed individuals as they will be responsible for assessing the employment status of the individual. From the individuals’ perspective, there may well be reluctance from larger businesses to engage self-employed individuals and a move towards an employment relationship.
It is vital that businesses and agencies understand IR35 so they can help end-clients make accurate status decisions and protect themselves.
Start preparing now
The private sector should benefit from the lessons learned from the public. It is strongly recommended that any business paying workers through intermediaries should review their arrangements to assess those off-payroll workers that are:
• Genuinely self-employed
• Definitely caught by IR35
• Potentially less certain and require detailed review
An early intervention to embark on a programme to identify those contracts that are at risk, plan how to manage any potential changes and ensure that steps are in place to make sure that PAYE is operated where appropriate from 6 April 2020, or introduce required changes, will be essential.
Experience suggests that private sector businesses are likely to require all of the extra time afforded to them to prepare for the change. Getting it wrong could result in significant liabilities to tax, national insurance, interest and penalties.
There is limited help available via the Check Employment Status for Tax (CEST) tool supplied by HMRC that enables businesses to check if individuals are employees or self-employed.
However, a recent BBC documentary found the tool was unable to give definitive answers in around 50% of cases. We strongly advise businesses to avoid relying solely on CEST when making IR35 decisions.
If you have any questions or concerns about the upcoming IR35 changes, contact Maurice Frost and our friendly Business Services Team on 01293 227670 or visit www.carpenterbox.com