IR35 2020 Reform – Key Points for Contractors
Thursday 11th July 2019 saw the announcement of draft IR35 legislation reforms; the finalised legislative reforms will be published in conjunction with the Autumn Statement.
While the April 2017 Public Sector reforms have seen both positive and negative impact, the CEST tool still leaves room for improvement – which has been noted by HMRC as is evident in their resolution to make improvements within the year.
We explain the key takeaways from the draft legislation below:
Draft IR35 Legislation – Rules for off-payroll working from April 2020
What are the key take away points from the July draft reforms?
The off-payroll reforms in the private sector are largely as expected and broadly mirror the reforms in the public sector.
As expected, the reforms will apply from 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.
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 current rules within the private sector allow a deduction of 5% prior to calculating your PAYE Tax and NI liability. This allowance is intended to compensate the PSC for the costs of administering the IR35 legislation. From April 2020 the PSC will no longer bear the responsibility for the determination of the IR35 status of the contract or making the payroll submissions to HMRC. As this will no longer be the responsibility of the PSC, the 5% allowance will be removed for contracts with medium and large organisations. This allowance has not been available in the public sector since April 2017. This means that 100% of the contract income will be subject to PAYE tax and NI deductions.
Where the responsibility remains with the PSC, as it will for engagements with small companies, the 5% allowance will remain.
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.
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 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 determination. 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 also apply in the public sector from April 2020.
Improvements to CEST
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.
So, in summary – what should I know about the April 2020 Off-Payroll Working Rules?
- The legislation is, as anticipated, set to reflect the changes made to the public Sector reform in April 2017. This includes the shift of responsibility to the end hirer to decide the IR35 status of the assignment, with the onus being removed from the contractor to make this decision.
- The ‘small company’ exemption, while it may be controversial, aims to lighten the burden of administration small companies are exposed to.
- CEST Tool improvements are anticipated to be accessible later in 2019.
- Debt transfer provisions set out in the public sector will also apply in the public sector from April 2020; 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.
- Status Determination Statement (SDS) will be introduced; this will be provided to the worker and the fee payer and include the status of the engagement and the reason for that decision.
- The right to appeal – referred to above, will also apply to public sector engagements from April 2020. If the worker or fee payer disagrees with the Status Determination Statement (SDS) they will make representations to the client.
- While the ideal resolution to an appeals process was to have an unbiased third-party led appeals process, client-led appeals have been drafted in.
- As seen in the public sector rules, the fee payer will be responsible for deducting PAYE tax and NI and paying this to HMRC.
- 100% of the contract income will be subject to PAYE tax and NI deductions; the 5% allowance will no longer be the responsibility of the PSC, and as such, fall away. Where the responsibility remains with the PSC, as it will for engagements with small companies, the 5% allowance will remain.
Who is affected by the April 2020 Off-Payroll Working Rules?
- “Individuals supplying their services through an intermediary, such as a personal service company (PSC), and who would be employed if engaged directly.
- Medium and large-sized organisations outside the public sector that engage with individuals through PSCs. Public sector organisations will also be affected by changes to improve the operation of the reform.
- Recruitment agencies and other intermediaries supplying staff through PSCs.” – From gov.uk
Mark Beal-Preston, Chief Commercial Officer of the Optionis Group which includes First Freelance said:
“We’re disappointed to see that many of the key concerns raised by the contractor community have been overlooked with this draft legislation. It now appears unlikely that there will be a shift in the policy or plans to implement these reforms in April 2020, and the big question for the industry is will businesses be ready in time to implement these changes without unintended consequences?
“If not, there is a strong likelihood that incorrect decisions will drive up costs and reduce the valuable skills needed on a contingent basis by clients throughout the UK.
“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.
“Across our business, we’ve been working hard to help our agency partners and contractors and their end clients understand what these changes mean in practical terms and to provide them with all the support they need to navigate these changes successfully.
“Whilst we welcome and support any efforts to drive compliance, safeguarding the interests of true contractors and freelancers is absolutely vital to the UK economy. There is a very real risk that access to skills will be severely limited if people choose to turn their backs on contractors because of these changes.”
Have a look through our IR35 guide here for a full overview of the topic, but if you’d prefer to have a specialist handle this aspect of contracting for you – get in touch with one of our IR35 specialists or chat with an advisor on firstname.lastname@example.org , by phone at 0203 962 5085 or click here to request a call back.
Published on: 12 July 2019 - By: First Freelance