The UK tax system is constantly evolving to make sure that all working citizens are paying their fair share of tax into the system, and the start of the next tax year makes no exceptions to this pattern. 6th April 2020 will see the implementation of the new IR35 amendments that are aimed at bringing private companies in line with the public sector. We hope this article will help you to understand the new rules and how they may affect you and your business moving forward.
The History of IR35
IR35 is also known as the “off payroll working rules”. The rules were originally implemented in the UK back in the year 2000 with the aim of determining those people who were using personal service companies to disguise their employment status with the aim of avoiding higher rates of income tax and national insurance.
Although the rules were created for the right reason, the implementation of them weren’t as well thought out. The system relied on the taxpayer to self assess whether they fell into the IR35 catchment or not, and hence whether they would need to pay additional tax or not. Unsurprisingly the rules didn’t change much, and people still continued to use personal service companies to disguise their true employment status, thereby paying much less tax to HMRC.
Personal Service Companies
A personal service company (also known as a PSC) is a limited company that has been created, usually for the main purpose of disguising a person’s employment status and aiding them in avoiding higher rates of tax. Personal service companies are identified by the following characteristics:
- They are usually named after the work themselves (i.e. John Smith Limited)
- They only have one employee on their records, and this tends to be the director/shareholder
- They tend to only work for one “contractor” for an elongated period of time (longer than 6 months)
Public Sector Changes
Under the historic IR35 rules the onus to determine a worker’s employment status sat with the worker themselves, and since this method of determination was less than effective at bringing perpetrators into line, HMRC decided to implement changes to the legislation throughout the public sector in 2017. The changes to the legislation saw the shift of responsibility for determination from the worker themselves to the end client (e.g. the NHS). This meant that almost every worker who provided services to the public sector on a regular basis was determined to be an employee, and as a result were forced onto a payroll scheme and paid appropriately using the PAYE rules.
Since the public sector did not want to face the large fines and penalties that would have come with non-compliance of the updated standard, they made a blanket rule to add all workers onto their payroll scheme. This was a huge win for HMRC.
Private Sector Changes
After the glowing success of the public sector implementation, HMRC has now decided to roll out the new rules to medium and large businesses in the private sector. This means that if your business falls into the Companies Act 2006 definition of a medium or large business, then from 6th April 2020 you will be responsible for determining the employment status of your workers, and will need to pay them in line with that determination.
Companies Act 2006 Definition
Under the Companies Act 2006 a company is defined as small if it meets 2 or more of these criteria:
- Turnover is less than £10.2m
- Balance sheet net assets are less than £5.1m
- Fewer than 50 employees
If your company exceeds 2 or more of the above criteria then you are determined to be a medium-large business, and as such the new IR35 rules will apply to you.
Small Company Exemption
Good news for small businesses. For now at least, the new IR35 rules do not apply to you, but I would not anticipate this staying the case for long. If the private sector roll out is successful then I don’t see any reason why HMRC wouldn’t continue to roll this out to small businesses too, so watch this space!
There has been a lot of confusion surrounding the implementation of the updated rules, especially with the constant elections and changes to Government officials we have seen throughout the past few years, so it is expected that HMRC will be applying the new rules as a “soft landing”. This means that for the first 12 months HMRC will be more concerned with educating businesses in how to apply the rules properly than they will be about punishing those that don’t apply them due to carelessness. Businesses that knowingly don’t apply the rules will of course be subjected to the full wrath of HMRC.
How to Assess Your Workers
HMRC have developed an online checking tool to help you determine the employment status of your workers and this can be found at https://www.gov.uk/guidance/check-employment-status-for-tax . This needs to be completed for each individual worker, and the results should be adhered to.
For any more information or clarity on how you feel this updated legislation might affect you and your business, please don’t hesitate to contact us on [email protected] or 01634 540340.