On July 11, the UK government published its long-awaited draft amendments to existing tax legislation, known as the Off-Payroll Working Rules, or IR35, in its ongoing crusade to crack down on noncompliance through disguised employment.
Due to come into force next April, IR35 will require businesses in the private sector that engage contractors who work through their own personal service company (PSC), to assess the individual contractor’s employment status for tax against well-established but complex legal tests. These include considerations of whether the client has the right to control the contractor or has in practice exerted control; whether the contractor has a genuine right of substitution; and how well the contractor is integrated into the business of the client.
The complexity in the revised rules does not end with the assessment. There are also complicated rules to determine whether a private-sector hirer has to comply with the rules in the first place.
Small Company Exemption
During earlier consultations, the government was urged to exempt the smallest businesses hiring PSC contractors and the result is an exemption for hirers who meet the statutory definition of a “small” company. According to the UK’s Companies Act 2006, a small company is defined as one that meets at least two of the following conditions during its financial year:
- annual turnover of not more than £10.2 million;
- a balance sheet total (meaning the total of the fixed and current assets) of not more than £5.1 million; and
- fewer than 50 employees.
The revised rules will therefore only apply to medium and large companies that exceed these thresholds.
While this exemption might be welcomed by some employers, those companies that meet the small company definition are growing but will have another administrative obstacle to consider as they expand.
From the start of the tax year following the end of the financial year in which a company ceases to be small, the hirer will need to assess the tax status of any PSC contractors already working for them before any payments are made to that contractor’s PSC. For example, if a hirer’s accounts show they are no longer a “small” company during their financial year ending March 31, 2021, they must undertake an assessment of any PSC contractors as to their employment status for tax and issue a statement giving their conclusion and any reasons for it before making any payments to the contractor on or after April 6, 2021.
Similarly, a private company experiencing declining fortunes and falling outside the remit of these revised regulations in their financial year will have to withdraw any such statements already made regarding contractors engaged in the following tax year.
For the relatively small number of independent contractors working for small companies, the exemption of hirers falling within the Rules adds to the red tape small companies need to consider as they grow.
Other Changes to Existing Rules
While providing an exemption for small private-sector hirers, the regulations have been extended to all public authorities and companies associated with them. The existing regulations only applied to those public-sector bodies subject to the Freedom of Information Act. The revised rules extend the scope to more public-sector bodies than were previously covered.
Other amendments in the draft rules:
- The private- or public-sector client must give a status determination statement to the worker; until they do this, the client is liable for all of the obligations that fall to the “fee-payer.” This means they, and not a staffing supplier, will be liable for calculating and deducting and paying tax on the contractor’s fee to HMRC as well as employees’ and employers’ National Insurance Contributions.
- For the status determination statement to reach the worker, the client must either hand it to the contractor, or have their contact details to send it to them or rely on parties in the supply chain such as the MSP, VMS or staffing supplier to remit the statement to the worker. This commitment will need to be covered by contractual clauses and indemnities as clients will be at risk of financial penalties if the statement does not reach the worker.
- The client must take reasonable care to reach a conclusion whether that be that the worker is inside or outside IR35. The existing rules only compelled a public sector client to take reasonable care if they concluded the arrangement was inside IR35. “Reasonable care” means taking into consideration the individual circumstances of the PSC contractor as well as the work arrangements and the relationship between the worker and the client’s business. This provision is intended to deter clients from making blanket determinations of roles as opposed to decisions on an individual basis.
- The statement must give reasons rather than simply state the conclusion. Previously the client only had to give reasons within 31 days if the person they contracted with requested reasons in writing.
- The worker and “deemed employer” — i.e., the fee-payer who will likely be the staffing firm — may both make representations to the client in the event they disagree with the conclusion. The client then has 45 days to respond with reasons for their conclusion following the representations.
Many private-sector organizations will have already started to make preparations for complying with the rules next April and there is much that hirers can do now to get ready for 2020, not least identifying those contractors who will be covered by the rules.
The draft regulations which set out the rules will go before Parliament as part of the Finance Bill 2020 later this year and may be subject to revisions depending on the strength of any opposition. With an estimate of £3 billion additional revenue for the government in the first few tax years after the measure is introduced, any opposition will have a difficult hill to climb to reverse the course the government is taking.