The Government’s consultation on proposed changes to off-payroll working in the private sector closed at the end of May. The impending changes will have a large impact on Limited Company / PSC Contractors when they are introduced in April 2020.
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 will remain the same, what will change is the responsibility for assessing IR35 status will move from the individual limited company / PSC to the hiring organisation (the end client), and the responsibility from 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 has already taken place within the public sector and is now planned to be extended into the private sector in April 2020.
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 widely thought 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 April 2020 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 an umbrella company such as Fair Pay Services. An umbrella company acts as their employer, completely taking away the risk of an IR35 assessment from the end hirer that they complete assignments for. When they work through an umbrella company, Contractors are full employees of the umbrella company. 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://fairpayservices.co.uk/ 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.
What happens next?
The consultation for off-payroll in the private sector has now closed and we expect to see the proposals included in the draft Finance Bill this summer. There will then be a final announcement in the Autumn Statement. We will stay informed as the proposed reforms become clearer and will communicate further once we know more.
If you would like to discuss your individual business circumstances in more detail, or discuss our solutions to the impending changes, you can contact Fair Pay Services on 0333 311 0633 (option 3) or firstname.lastname@example.org