The off-payroll working rules, commonly referred to as IR35, were first introduced in 1999. The introduction of this legislation was designed to ensure contractors who are working in a similar way as an employee would pay the same Income Tax and National Insurance contributions as employees typically would.

During the 2018 Budget, it was announced that the off-payroll working rules in the public sector would be extended to the private sector. The off-payroll reforms in the private sector are largely as expected and broadly mirror the reforms in the public sector.

As anticipated, the reforms will apply from 6 April 2020. HMRC have confirmed that they are not seeking to apply this retrospectively and will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time.

In light of this news, we have put together a breakdown to help you unpick just what was announced on Thursday 11th July 2019, and what this could mean for you:

The small companies exemption

As expected, the reforms will only apply to medium and large companies. The current rules will continue to apply to contracts with small companies, as defined in the Companies Act 2006.  This is HMRC’s attempt to minimise the administrative burden for small companies.

The 5% allowance

The draft legislation introduces a new power for HMRC to collect unpaid PAYE from other parties in the supply chain. This will apply to all contracts in the public sector and engagements with medium and large companies in the private sector from April 2020.

The regulations make provision authorising the recovery from a ‘relevant person’ of any amount that an officer of HMRC considers another person should have paid under PAYE regulations in respect of a deemed direct payment.

This means that if the fee payer fails to make deductions and pay the PAYE tax and NI liability, HMRC can recover the unpaid liability from other organisations in the supply chain. 

PAYE tax and NI deductions will be made at source by the 'fee payer'

If the client determines the engagement as inside IR35, the amounts paid to the workers intermediary for the workers services is to be treated as employment income. As with the public sector rules the fee payer will be responsible for deducting PAYE tax and NI and paying this to HMRC.

Introduction of a Status Determination Statement (SDS)

The legislation introduces a Status Determination Statement (SDS),this must be provided to the worker and the fee payer and include the status of the engagement and the reason for that decision. The client must have taken reasonable care to arrive at the decision in order for the SDS to be valid.

The client will have ‘fee payer responsibilities’ until they pass the SDS to the worker and the party they contract with i.e. they will be responsible for any tax liability. The last party in the supply chain to receive the determination is classified as the fee payer and will take fee payer responsibilities.

Introduction of a statutory client-led disagreement process

The legislation outlines a client-led status disagreement process, this will also apply to public sector engagements from April 2020.  If the worker or the fee payer disagrees with the Status Determination Statement (SDS) they can challenge this. The client must respond in 45 days to inform the worker or feepayer that either the decision stands and give the reasons why it has reached that decision or give the worker and the deemed employer a revised SDS.

Debt transfer provisions

The draft legislation introduces a new power for HMRC to collect unpaid PAYE from other parties in the supply chain. This will apply to all contracts in the public sector and engagements with medium and large companies in the private sector from April 2020.

The regulations make provision authorising the recovery from a ‘relevant person’ of any amount that an officer of HMRC considers another person should have paid under PAYE regulations in respect of a deemed direct payment.

This means that if the fee payer fails to make deductions and pay the PAYE tax and NI liability, HMRC can recover the unpaid liability from other organisations in the supply chain.

Improvements to the Check Employment Status for Tax (CEST) tool

In the key information document, HMRC advises that they are making improvements to CEST and the improved tool will be available for use later in 2019.

Our thoughts

Mark Beal-Preston, Chief Commercial Officer of the Optionis Group which includes Nixon Williams, said:

"Across the industry, there is still a distinct lack of understanding about the new rules - from contractors to recruitment agencies and end clients. There are still question marks hanging over the reliability of government's CEST tool and if it can really make the necessary changes to needed provide accurate assessments in line with case law, as well as delivering planned education on how to prepare businesses in time."

Need more advice?

IR35 legislation can get confusing rather quickly and it can take time to get your head around it. We’ve had a wealth of experience in dealing with the finances of contractors, so we’re able to answer any questions you may have regarding the off-payroll rules. We’ve also put together a collection of helpful guidesIf you would like to speak to us about IR35, please get in touch with our team on 01253 843180.