IR35: HMRC publishes private sector tax rules

Organisations have just nine months to prepare for changes to off-payroll working rules, which are being extended to the private and third sectors, with HM Revenue & Customs (HMRC) publishing draft legislation today.

From April 2020 private sector firms will have to check whether contractors need to pay income tax and national insurance contributions, shifting the responsibility for conducting such checks from the contractor to the organisation using their services.

The reformed rules – known as IR35 – have been in place for public sector organisations contracting workers supplied through their own personal service companies (PSCs) since 2017.

But the draft Finance Bill published today (11 July) states that private sector firms that enter into contracts or make payments to workers engaged through a PSC on after 6 April 2020 will have to check the workers’ tax status.

HMRC said the changes are expected to affect 170,000 individuals working through their own company, who would be employed if engaged directly, as well as up to 60,000 organisations that use workers employed by a PSC.

The recruitment sector is likely to be significantly affected: around 20,000 recruiters will need to operate payroll for any workers they supply who work through their own company.

Tom Hadley, director of policy and campaigns at the Recruitment and Employment Confederation, said the legislation in its current form risks damaging the UK’s productivity and labour market flexibility.

“We know from experience that the IR35 rules are a huge problem for employers and contractors alike. Making sure everyone pays the right tax is essential, but the rules need to be clear to be effective. The last thing private sector businesses need at this time of Brexit uncertainty is rushed or poorly-designed tax rules that add further uncertainty to an already fragile business landscape,” he said.

“The government must urgently reconsider its choices and delay changes to IR35 until at least April 2021.”

While the roll out of IR35 will essentially mirror the rules in place in the public sector, MHA MacIntyre Hudson’s employment tax director Nigel Morris agreed that some issues needed to be resolved.

“The jury is still out on the review of the Check Employment Status Tool (CEST) which has been given a vote of ‘no confidence’ by the profession. It will be an important tool for those involved with IR35, yet no update was provided today,” he said.

He noted that an incorporated organisation would be caught by the new rules if they have 51 employees, but an unincorporated business would not.

Lewin Higgins-Green, head of employment and mobility taxes at Macfarlanes, warned organisations against taking a “blanket approach” to deciding whether a worker should be treated as an employee for tax purposes, as they need to provide reasons for each determination.

“The first step for employers is to identify the contractors that are engaged through personal service companies, and review their contracts and working practices – this could be many thousands of contractors which will need to be reviewed on a case by case basis.

“In some cases this may mean the need to establish new ways of working if engaging contractors has been typically business led. HR, tax and legal teams will want to take greater ownership to ensure no cases fall through the cracks,” said Higgins-Green.

But Dave Chaplin, CEO of guidance resource ContractorCalculator, said HMRC was essentially asking organisations to “judge tax crimes before they have been committed” with no way to appeal to a court.

“Under the new rules (Chapter 10), the hiring firm must make an assessment of tax status for someone, before they start work, and before the full facts are known. It’s like trying to judge someone before they commit a crime,” he said.

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“Worse still, if the hirer decides you are going to be (in the future) within the rules, they then deduct tax from source, and there is no way to appeal the full tax at a later date. This is because the largest portion of the tax they deduct from their costs is employers’ national insurance. Contractors cannot get this back at a tax tribunal, because they never paid it – their ‘deemed employer’ did.”

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