Since 2000, rules known as IR35 have been in place to regulate the tax treatment of income earned by individual contractors or consultants supplying their services through an intermediary, often a personal service limited company. The rules are complex, but broadly apply in situations where the consultant’s relationship with the company that engaged their services is such that, if they had been contracted directly by the end client, they would be an employee. The rules make sure that these consultants, who would otherwise be classed as employees, pay broadly the same tax and NI contributions as genuine employees.
At the moment, the consultant’s intermediary is responsible for deciding the employment status of the consultant. As this is usually their personal service company, it is effectively the consultant themselves who determines this. If they would be a deemed employee of the end user client were it not for the intermediary, then the intermediary company has to operate payroll and deduct tax and National Insurance contributions from any fees received.
In 2017, off payroll working rules were introduced in the public sector, which passed responsibility for determining status from the intermediary to the end public sector client. These rules are being extended to medium and large business in the private sector from April this year.
From 6th April 2020, medium and large private sector businesses who engage workers through intermediaries will be responsible for deciding whether the workers have deemed employment status. If they do, the end-user client, or the person who pays the fees for the work done, will be responsible for accounting for tax and NI. These rules will apply to companies to which two or more of the following criteria apply:
If these criteria are not met, the company is deemed to be ‘small’ and IR35 will continue to apply. The rules will also not apply to workers supplied by an employment agency or umbrella company.
To assist in determining employment status, HMRC have an online tool referred to as the CEST tool, which is effectively a questionnaire that takes the information entered and makes a determination on status. The deemed employment status is only for tax purposes, and does not confer additional employee rights on the individual. There is no obligation to use the CEST tool, but HMRC have stated that they will be bound by its results provided the information entered is accurate and has not been manipulated. Further HMRC guidance on using the tool is also available.
Some companies to whom these changes apply may decide to reconsider the contractual relationship with those they currently engage through intermediaries. If the relationship remains the same, the company will have to make an assessment of employment status for the relevant workers. If they are deemed to have employment status for these purposes, future payments must go through payroll and have tax and NI contributions deducted, including employer’s NI contributions.
The company making the determination must notify the worker and intermediary of the decision and the reasons for it. There must also be a dispute resolution process by which the worker can challenge the determination which has been made. The company will have to respond to a challenge within 45 days either explaining why it is maintaining its decision, or reversing its decision. If it fails to do so, it will be treated as the fee payer and will have to operate payroll and make tax and NI deductions.
The government has clarified that the extension of the rules will only apply to payments made after 6th April 2020, so current payments to those engaged through an intermediary do not need to change. However, decisions about employment status and who is responsible for tax and NI will need to be made as soon as possible, so that arrangements can be put in place to ensure compliance after 6th April 2020.
MSHB can assist with advice on employment issues. For help with this or any other issues, contact our Employment Team today.