With IR35 on the horizon, there remains a lot of confusion amongst business about how exactly it will affect them. In this article we look at the most common questions we have been asked in the lead up to the implementation of IR35 on 6 April 2020.
Question: What is IR35?
IR35, so named for being the 35th press release by HMRC, is an attempt by HMRC to tackle what it believes is disguised employment. In summary, the focus of IR35 is to identify individuals engaged by a business (the end user) through an intermediary or personal service company rather than being employed directly by the end user. As a result of this type of setup, the individual gains a tax benefit, despite, in many cases doing similar work to employees of the end user and being under the control of the end user.
Question: Why has IR35 been sprung on businesses at such short notice?
Technically it hasn’t. We have known about “off payroll working” since approximately 2000. In 2017 the introduction of IR35 in the public sector caused a widespread panic. From 6 April 2020 this will be extended to the private sector and it is this change that is now a cause of concern for many businesses.
Question: So we know exactly what the rules are and what to do by 6 April 2020?
Not quite. We have just received the government review of IR35 which contains further guidance on the topic. We now await the budget on 11 March 2020 which should give further clarity. Finally, we still don’t have the final legislation which will likely arrive in the weeks before 6 April 2020. We have seen the draft legislation and know roughly what the final version will say but that has yet to have sign off.
Question: So what exactly is changing?
Currently it is for the individual/agency/personal service company to identify whether their assignment with an end user will classify them as an employee (and thus attract a higher tax rate). Unsurprisingly, very few individuals identified as employees and therefore remained at the lower tax rate. Should it be found that such a review was incorrect, the personal service company/individual were responsible for repaying the tax/fines levied by HMRC.
From 6 April 2020 the responsibility for identifying the employment status of the individual will transfer to the end user or employment agency. If the end user/agency believes that the individual may classify as an employee, then it will be for the them to make the correct deductions for PAYE from the fee agreed with the individual/personal service company. Should the end user fail to correctly identify the employment status of individuals then they will become responsible to HMRC for tax demands and any fines levied.
Question: I have heard the implementation date may be delayed until next year, is this true?
Highly unlikely. Despite protests outside parliament and the introduction of a new Chancellor triggering hope of a delay, everything is pointing towards the legislation coming into force on 6 April 2020. We should know for sure during the budget on 11 March 2020.
Question: If an individual undertakes work now but bills the end user after 6 April will they be caught by IR35?
The government have recently updated their guidance to state that the changes will only apply to payments made for services provided on or after 6 April 2020.
Question: Are we expecting large fines from day 1?
This is highly unlikely. Speaking at an event in Birmingham last weekend, the Chancellor stated that “I’ve spent time with HMRC to ensure they are not going to be at all heavy handed for the first year to give people time to adjust as well which I think is an appropriate and fair thing to do”.
Question: How do I know if this affects my business?
A thorough review of all contractors should be carried out to investigate whether your business is affected. A status determination test should be done for each individual to ascertain their status and a copy of that provided to the individual/personal service company. The government has produced an online CEST (Check Employment Status for Tax) tool to assist businesses in making such decisions. The tool asks a number of questions which should be answered as honestly as possible. HMRC have stated that they will stand by the outcome provided by the tool as long as questions have been answered honestly and with reasonable care. The tool is available here.
Question: The CEST tool doesn’t give me a definitive answer
This, unfortunately, is a very common problem with the tool. After some behind the scenes work in November 2019, the tool was updated and whilst it appears to have been improved, there are still criticisms that it is not fit for purpose. The main criticism is the amount of people who were receiving a result of “unable to make a determination”. Whilst this has thankfully reduced, we suggest in such circumstances to run the test again. Where the outcome remains, it is probably worthwhile taking specific legal advice on the matter.
Question: What if the contractor disagrees with the CEST outcome provided by the end user?
There is an appeals process in place which the end user/agency must use. This must be responded to within 45 days.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.