15 November 2019
IR35- Are you self-employed?
Private sector firms will have to take responsibility for confirming the true status of their relationships with contractors from 6 April 2020.
IR35 (which is part of the off payroll working rules) is a set of regulations that intends to combat tax avoidance by consultants who are providing a service to clients via a personal services company (PSC) and would be considered, for tax purposes, to be an employee of the end user company.
IR35 has often been criticised for being overly complex, disruptive to business and poorly executed by HMRC – in fact figures from 2017 show that the government department has lost 5 out of every 6 challenges to its IR35 related fines. In order to tackle the challenges associated with IR35, significant changes are being made in 2020 that will have a wide ranging impact both on end user companies and the consultants themselves.
Key changes in 2020
On 6 April 2020, the end-client will become responsible for establishing whether a contract engagement with a consultant via its PSC falls within the rules. Up until then, it is the responsibility of the person supplying the services to make this determination. The rules will bring the private sector in line with the changes brought in for the public sector in April 2017.
This new legislation will only apply to medium or large businesses. There will be an exemption for end-clients who are ‘small businesses,’ where the responsibility for determining the IR35 status of a contract will remain with the PSC and the new changes will not apply.
It’s important to note that the government has included clauses in the legislation to ensure that medium or large businesses do not set-up arm’s length companies or subsidiaries to procure services from PSCs. The legislation will apply to the parent company based on the aggregate amount of turnover and the aggregate amount of the balance sheet total of the connected entities. There’s no small business exemption for public sector organisations and the legislation will apply to all end-clients engaging PSC workers in the public sector.
Check of Employment Status for Tax (CEST)Tool
HMRC recognises that CEST needs to be improved if businesses and contractors are to make correct decisions on whether off-payroll working rules apply. Many experts agree believing that its assessment on; whether a contractor has control over tasks, if they bear financial risk, whether they can be substituted for another contractor (which should all be in place), and mutuality of obligation (which considers the extent of the requirement to be offered and to accept work); is not effective. In fact, CEST is only able to provide an answer in 85% of the cases.
The Chartered Institute of Taxation has given its view that CEST needs a substantial upgrade before the new off-payroll working rules are introduced, "if businesses are to make the correct decisions on whether the off-payroll working rules apply."
Top 10 industries with the most freelance and contractor jobs according to Flexjobs. Contractors and engaged companies in these sectors are urged to review their relationships now.
1. Computer and I T
3. Accounting and finance
4. Customer service
5. Software development
6. Medical and health
7. Project management
10. Education and training
B P Collins can help...
If you engage a consultant or currently provide your services as a consultant through a PSC, our clear advice is to act now to assess your engagements to see whether you fall within the rules.
For end user companies, B P Collins can provide an onsite audit of your arrangements and give you a view as to whether an engagements falls within the rules and whether your agreement with your contractors should be restructured. Failure to do this could result in substantial tax liabilities and penalties for consultants and, if not corrected by 6 April 2020, this liability could extend to the engaging company.
If you’re also unsure about whether the outcome of a CEST search is accurate and need an expert opinion, B P Collins can also help.