In keeping with the House of Commons’ ‘financial privilege’ that the House of Lords will not amend a money bill, Finance Bill 2019-21 passed its second reading in the Lords on Friday. It then passed its committee stage, report stage and third reading as formalities in the same day. The final stage is to present it for royal assent (approved by the Queen), and for it to become law as the Finance Act. A key part of Finance Bill 2019-21 are the changes to the off-payroll working IR35 rules.
What is IR35?
The Intermediaries Legislation (IR35) was introduced in 2000 and aimed to remove the tax advantage of providing services via a limited company / PSC where it could be proved that were it not for the limited company / PSC, the actual business relationship between the contractor and the hiring organisation would be one of employment.
What’s changing and how will it affect Contractors?
The underlying rules themselves remain the same, what changes is the responsibility for assessing IR35 status that move’s from the individual limited company / PSC to the hiring organisation (the end client), and the responsibility for making the deductions and payments of tax and national insurance contributions will move to the recruitment business or hiring organisation that pays the limited company. This change which has already taken place within the public sector, was then planned to be extended into the private sector in April 2020 and is now confirmed for April 6th 2021.
The key difference is that the public sector reform was a blanket approach, whereas the private sector reform is to only affect ‘medium’ and ‘large’ businesses. The ‘small’ businesses that will be exempt from the new responsibilities are now confirmed to be defined as;
- Turnover of £10.2m or less.
- £5.1m or less on its balance sheet.
- 50 employees or less.
It’s important to note, the size of the business relates to the hiring organisation that the contractor is providing services to, not the recruitment business that is sourcing the work and making the payments.
If the hiring organisation is ‘medium’ or ‘large’ and the assignment is deemed by them to be ‘Inside IR35’, the new legislation will require the business making the payment (usually a recruitment business) to pay a ‘deemed employment payment’ to the limited company / PSC, making deductions for employers national insurance, employees national insurance and income tax. The limited company / PSC then pays the net amount to the worker as a salary or dividend.
What can Contractors do about these changes?
Although 6th April 2021 may seem a long way off, it would be sensible to at least consider their future options.
Their options could include:
- To finish contracting and join the end hirer as a permanent employee or join the recruitment businesses PAYE scheme if this is an option.
- To carry on working through their limited company / PSC, paying a ‘deemed employment payment’ to cover employers national insurance, employees national insurance and income tax, determined by the end hirer and deducted by the recruitment business. In addition, usual accountancy fees and Corporation Tax where applicable would still be due. You could offer a rate enhancement and work to a reduced profit margin to help with this if the charge rates with your end hirer’s allowed this.
- Another option is for them to work through a PEO (Professional Employer Organisation) or umbrella company such as Fair Pay Services. A PEO or umbrella company takes on full employers responsibility, completely taking away the risk of an IR35 investigation from the end hirer that they complete assignments for. When they work through a PEO or umbrella company, Contractors are full employees of the intermediary. They still enjoy the flexibility of contracting but are taxed via PAYE, ensuring no end of year tax returns or nasty surprises and they gain full employment rights such as Holiday Pay, Sick Pay, Maternity / Paternity Pay and Pensions etc…. You can visit https://www.fairpayservices.co.uk/agencieshome/ to find out more about our services.
As their recruitment business / agency, it would be wise to start engaging with your Contractors now so you are giving them the correct information rather than somebody else, perhaps one of your competitors.
Next Steps
There is no longer any reason to delay preparations for the changes to the off-payroll working IR35 rules in the hope that they won’t happen. The impending changes will have a large impact on Limited Company / PSC Contractors when they are introduced on April 6th 2021 and as we saw on this year’s ‘dry run’ – April will be here before we know it!
If you need help getting ready, we are here to help you prepare and have robust solutions to help you remain compliant. If you are an existing client, you can contact us via your account manager. If you are a new client please contact us on 0333 311 0633 (option 3) or [email protected]
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