IR35, also known as the Intermediaries Legislation, is complicated and with major changes set to come into effect in 2020, the time is right to understand IR35’s complexities and how it could impact your business.
What is IR35?
First introduced in 2000, IR35 is designed to reduce tax savings by contractors who HMRC believe to be “disguised employees” – people who, were it not for their limited company (aka a PSC), would be considered an employee of the End Client and therefore paying a higher level of tax and national insurance.
The majority of these transactional relationships are genuine, and there are plenty of sole trader limited companies operating in the UK. However, it’s not uncommon for some organisations to pay people in this way to avoid paying employers’ National Insurance contributions or providing employment benefits. Where this is the case a HMRC inspector will determine this by applying an employment test to each case, which is based on the actual working practices, rather than any contract.
What impacts will the reform have?
The biggest change is to End Clients who will become responsible for determining whether a contract with a PSC is inside or outside of IR35. The End Client must confirm the IR35 status of a contract by providing a ‘Status Determination Statement’ (SDS). This is a written determination which provides a conclusion as to whether IR35 applies to the engagement and must provide the reasoning. The SDS must be provided in writing to the PSC worker and, if an Agency is involved in the labour supply chain, a copy must be provided to the Agency responsible for paying the PSC.
The End Client must implement its own “disagreement” process to allow the PSC to raise any objections to the SDS. The legislation does not specify how such arrangements should work in practice but does state a time limit of 45 days to respond, in writing, to the PSC with the outcome of the review of the dispute. The decision must either confirm the original SDS is upheld, or, if it involves a revised SDS or conclusion, a new SDS must be provided.
Until the SDS is issued, or if the dispute resolution is not managed within the required time, the End Client will be deemed the “Fee Payer”, the effects of which are mentioned later. End Clients will also have to prove they have taken “reasonable care” throughout this process, effectively ruling out blanket role-based determinations, otherwise they could fall foul of the legislation.
Who is the Fee Payer and what does it mean?
The Fee Payer is responsible for ensuring the correct tax treatment is applied to the PSC and will be held financially liable if not. The Fee Payer is typically the party closest to the PSC in the contractual chain (i.e. the party physically paying the PSC) but failure of any party to perform their part correctly could expose them to being declared the Fee Payer.
Transfer of debt?
Aside from the party left holding the SDS and having the potential liability as Fee Payer, the legislation also grants provision to the PAYE regulations to seek recovery of any unpaid tax and NI from any “relevant person”. A relevant person is simply any party to the arrangements in which the relevant payment to the PSC is made.
Within HMRC’s published response to the consultation, they appear to want to hold the highest agency in the chain accountable for any non-compliance (and where it cannot recover from that agency, then the end client).
“The government believes transferring tax and NICs liabilities where there has been non-compliance in the labour supply chain and where it is not possible to secure the tax liability from the noncompliant entity to the first agency and then to the client, will incentivise all parties in the labour supply chain to take steps to apply the rules as intended. The government hopes this will support the majority of organisations who comply with the rules”
In essence it is vital for End Clients to ensure a robust, compliant and trustworthy supply chain as HMRC will always view them as the final recourse.
The next steps
The government has asked for comments on the draft legislation by September 5th 2019 with further feedback expected from them later in the year. IR35 Private Sector reforms are planned for implementation on 6th April 2020 and companies should prepare for their impact immediately. Please review our IR35 FAQs for further guidance on what this may mean for your business.