IR35 is a set of tax rules designed to catch situations where individuals provide personal services through their own personal service company, and the nature of the relationship with their customer is more akin to an employment relationship. Where these rules apply, additional tax and NIC is due, intended to broadly put that individual in the same position as they would be if they were directly employed by that customer.
The rules changed three years ago for contracts in the public sector, and now the rules are changing from April 2020 in the private sector, with the changes broadly mirroring the new public sector rules. This brief technical note explains what both contractors and subcontractors need to be thinking about and potentially putting in place before then.
Under the current system it is the responsibility of subcontractors to decide for themselves whether the IR35 rules apply to their contracts, and if so to self-assess various “deemed payments” and pay across tax and NIC to HMRC. There is no direct impact on the end client.
Under the new rules being implemented from April 2020 in the private sector, the responsibility for determining IR35 status is moving generally to the end client meaning that they will have to decide whether their subcontractors are within IR35, and if they are, obligating them (or their agency if appropriate) to deduct PAYE and NIC from the amounts they pay to them.
However, there is an exemption from the new rules where the end client is small, according to the size criteria used by Companies House. Where this exemption applies, the new rules will not apply and therefore their subcontractors will remain responsible for managing and self-assessing any IR35 liabilities.
In order for the end client to be classed as small, it needs to meet two of the following three criteria:
- Turnover £10.2 million or less
- Balance sheet £5.1 million or less (gross assets before liabilities)
- 50 employees or less
Where the end client is part of a wider group, the test should consider all businesses within the group combined.
There are therefore three potential scenarios if these rules are relevant for you.
You are the end client, and are classed as small
As your company is within the size limits, the new rules will not affect you and therefore your contractors will remain responsible for managing and self-assessing any IR35 liabilities.
Having said that, it may be that some of your subcontractors are (mistakenly) expecting to hear from you about their status from April 2020 onwards without realising that nothing is going to change in respect of their contracts with you.
We would therefore recommend that you contact your subcontractors in this regard and explain to them that you are aware of the IR35 changes in rules from April 2020, but that because you are a small company, the new rules do not apply. Therefore IR35 remains their responsibility to manage through their own company’s tax affairs.
This will then avoid any situation where they may be mistakenly awaiting an IR35 determination from you and therefore getting themselves on the wrong side of the taxman.
You are the end client, and are not small
Because your business is above the size limits, these changes will affect how you need to handle your relationships with your subcontractors.
In summary, you will need to review all your subcontractor contracts to decide for yourself whether you believe the IR35 legislation will apply to them – a good starting point for this is to use the HMRC “Check Employment Status for Tax” (CEST) tool. Once you have done this, you then have an obligation to provide each subcontractor with a note of the determination you have reached, i.e. whether you consider their contract is inside or outside the rules. You also need to explain how you have reached that decision – if you have used the CEST tool it will allow you to print out the result showing how you have answered the questions, so you can simply send a copy of this.
Where you determine the contract is inside the rules you are also required to make a process available to your subcontractors to make representations to you if they disagree with the decision. You will be required to consider these and make your final decision within 45 days of receiving these representations. However the final decision remains with you.
For any contracts caught by the rules, from April 2020 onwards you will be required to make your payments to them through your payroll subject to PAYE and NIC deductions. If you use an agency, you will need to instruct them to start making the deductions on your behalf.
Clearly there is a lot more detail to this, and if you need help in putting your processes and communications together to ensure you are complying with the new rules, please do contact us for further advice and support.
You are a subcontractor operating through your own company
Where your customer is small, according to the size criteria, the new rules will not apply and you will remain responsible for managing and self-assessing any IR35 liabilities, as now.
If your clients (or some of them) are not small then you should expect to hear from them in advance of April 2020 with a determination of whether they consider your current contract to be caught by the IR35 rules. If they decide it is not, then nothing will change.
If they decide that the contract is caught, then they will be obliged to tell you why they have reached that conclusion, and to provide you with a process to appeal and make representations to them if you disagree. They will be required to consider these and make a final decision within 45 days, and this final decision will be entirely theirs.
If that determination therefore does not change, they will start to withhold PAYE and NIC from the payment of your invoices from April onwards.
Many of our clients are looking at alternatives to operating through their companies where it looks like there is a high risk that these rules may apply – there is a lot to consider here, and if you need any further help or guidance either on the new IR35 rules or alternative business structures, please do contact us for assistance.
If you have any questions, please contact James on 01242 776000 or email email@example.com.