Confirmation of the extension of IR35 to private sector companies
The private sector has been on notice for the past year that the Government was looking to change the way businesses could engage with self-employed individuals through Personal Service Companies – the IR35 rules. On 11 July the release of Draft Finance Bill confirmed that these changes will become legislation in April 2020.
What is IR35?
IR35 rules apply where an individual provides their services through their own limited company, called a Personal Services Company (PSC). This means they do not pay employee income tax and National Insurance Contributions (NICs).
Under these arrangements, the PSC enters into a contract with an organisation to provide services under an agreement that the individual will carry out the work. Realistically, there is no intention for anyone other than the individual to provide the contracted services, and they are treated similarly to other employees. Where IR35 applies, HMRC will regard the contracting organisation as an employer of the individual.
What does it mean for me?
In this scenario you will be considered the employer and will be required to make appropriate tax and NIC deductions if you engage with a PSC like that. You will be responsible to making the assessment of the true status of the individual under the new rules too.
If you engage with self-employed contractors, you will face greater scrutiny from HMRC under the new legislation. We are already seeing HMRC taking steps to enforce the legislation in the public sector.
Who is affected:
- Medium and large sized private sector organisations that engage with individuals through PSCs
- Recruitment agencies and other intermediaries who supply staff through PSCs
- Individuals who provide their services through a PSC
What happens if I get it wrong?
Assessing the status of an individual incorrectly could mean you are liable for significant back-payments of tax and NICs along with penalties, fines and interest.
What to do now:
You should not wait until the draft legislation becomes law in April 2020 to take action. There are simple steps to take now, to ensure you don’t get caught out:
- Identify and review your consultant / contractor relationships – are they truly self-employed, or is the relationship closer to that of a worker or employee? You need to consider the day to day reality of the relationship
- Ensure you have written terms of engagement with contractors and consultants whichare clear, and accurately reflect their true status
- Consider how services are provided to your organisation, and by who – you may want to change contractors into employees or make use of zero-hour contracts or casual worker agreements with gaps between engagements to avoid continuity of service.
This is an opportunity to review what you have in place and ensure it is fit for purpose. A review now will help you identify any issues and address them before HMRC does. It’s also a chance to ensure your staffing structure doesn’t expose your business to unnecessary risk.
If you are unsure about what the IR35 rule mean for your business, get in touch and we’ll be happy to help you.
