The government has published draft legislation, expected to take effect in April 2020, which will extend “off payroll” rules (commonly known as IR35) currently applicable in the public sector to “medium and large” organisations in the private sector.
IR35 allows HMRC to look behind a contractual relationship between a limited company and another organisation to see if it is masking a true employment relationship. If it determines that it is, then it will charge income tax and national insurance contributions (and likely fines and interest) through PAYE.
However, HMRC were only previously able to pursue the limited company providing the person alleged to be the employee, not the “end user”. This left it with an enforcement problem: it is expensive to pursue thousands of individual companies, many of which may not be solvent enough to satisfy the tax bills, fines and interest.
The changes made to the public sector, and to be extended to “medium and large” organisations in the private sector, are that the end user is now responsible for reaching a conclusion on whether the individual supplied by the limited company is truly an employee. If they don’t take “reasonable care” when coming to a conclusion that they are truly self-employed, and HMRC disagree, they would be responsible for the tax and national insurance (and interest and penalties) due.
The changes won’t apply to small organisations, which means two or more of:
- Annual turnover does not exceed £10.2million
- Balance sheet total does not exceed £5.1million
- No more than 50 employees
What does this mean for organisations?
All but those meeting the definition of a small organisation who engage contractors through a limited company will need to engage with the new legislation. Assessments should be carried out in respect of all contractors to determine whether they should in fact be treated as employees. It’s worth doing this well in advance of April 2020, as the assessments could take some time if there are a number of contractors to consider.
What does this mean for contractors?
Contractors working through a limited company for a medium or large organisation may find that they take a different view of their employment status. Organisations may take a more cautious approach than individual companies have to date, conscious that HMRC are more likely to take enforcement steps against those with bigger pockets, and with more tax at stake when covering multiple contractors. Whilst substitution clauses have long been thought to point to self-employment, we may see HMRC look to challenge these as a sham where they appear not to be genuine and all other factors point to employee status.
Whatever your personal circumstances the above is only a guide and we would advise you to contact us to obtain definitive advice as you will appreciate that each person’s circumstances are unique to them.