New ‘Off payroll working’ rules (IR35)

What is IR35?

The IR35 rules were originally introduced in 2000, with the object of making sure that any individual hired for work via a personal service company, in circumstances which suggest an employer/employee type relationship, pays taxes at the same levels as “on the books” workers.

What are the ‘new rules?’

In April 2017 revised rules came into force, but for workers within the public sector only, which shifted the burden of deciding workers’ status from them, to the body hiring them.  This measure having been deemed to have worked well, from April 2020 these rules are extended to apply to medium and large private businesses, who engage workers in this fashion.

It is important to know that the actual rules surrounding IR35 have not changed, not the criteria for the legislation to apply.  It is merely a change in where the responsibility lies, in terms of the assessment of each engagement.  More importantly perhaps, the liability if and when a failure to pay the correct taxes occurs has also shifted.

Is my contractor medium/large?

Broadly speaking a businesses will be medium or large category if at least two of the following apply:-

• At least £10.2 million turnover
• Balance sheet value of at least £5.1 million
• Having 50 or more employees

Why does this apply to me?

It is because the burden of assessing and reporting (and the liability for any errors) has shifted, that we are seeing more people come to us, telling us that they have received correspondence from contractors, suggesting that PAYE will apply going forward.  If you are affected by this, it is important to know at the outset that the shift in responsibility will inevitably result in contractors erring on the side of caution.  It will be for you to demonstrate to them (not necessarily HMRC) that the circumstances of your engagement continue to qualify for your existing tax treatment.

What can I do?

HMRC has published a revised and updated electronic checking tool, into which taxpayers can input their details with a view to HMRC giving a view of the relevant engagement.  Should HMRC’s tool produce a verdict that your circumstances are not that of an employee, then you could present this evidence to your contractor and ask them to reconsider.  You should take care when completing the toolkit as, if inaccurate information is inadvertently given which results in an incorrect position being provided by HMRC, they would not stand by their opinion should the need arise.  In any event, the contractor is likely to want to review the information which led to HMRC’s “self-employed” finding, and compare it with their own understanding of your engagement.

The Check Employment Status Tool (CEST) can be found here:-

https://www.gov.uk/guidance/check-employment-status-for-tax​

A help guide for using the CEST can be found here: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm11000

Ultimately, what needs to be appreciated is that the decision will rest with the contractor.  It may well be that, regardless of any other considerations, they may wish to ‘play safe’, and only offer engagements on an employment basis, or via an ‘Umbrella Company’ (see below).  Should that be the case, there is little which can be done if they are insistent.

Umbrella Companies

The introduction of the new rules into the public sector in 2017 resulted in an increase in the number of umbrella companies operating, and the extension to the private sector this year will certainly increase the use of these organisations still further.

It is important to note that there is nothing inherently wrong with operating your contracts via an umbrella company, but they should not be used to ‘get around’ the new rules; ultimately if the circumstances of your engagement are such that you should have been deemed an employee, then your tax treatment must follow that judgement.  Whether you are deducted PAYE and National Insurance by the end user, your exiting personal service company, or an intermediary such as an umbrella company, ultimately all that matters is whether you are deemed an employee or not.

If you are considering the use of an umbrella company it is absolutely vital to use one which is credible and compliant.  Beware in particular any organisation claiming to be “HMRC approved”, and certainly one which doesn’t put all of your earnings through an RTI payroll.  Such actions can only realistically be to disguise your income and avoid tax.  However compliant umbrella companies can provide the benefits of employed status to at least partially compensate for any increase in tax liabilities.

Review of changes

The Government is currently undertaking a limited review of these legislative changes, a review which is scheduled to conclude by mid-February.  However, it is highly unlikely that this will see any substantive changes to the rules, as the stated purpose of the consultation is merely to make sure that their actual implementation goes as smooth as possible, come April.

If you require further guidance please do contact us for advice.