New IR35 rules for contractors in the private sector from 6 April 2020Print publication
New IR35 rule changes due to take effect in the private sector from 6 April 2020 will have a significant impact on businesses that engage consultants or contractors via intermediary companies (either directly or through an agency). Affected employers will need to plan for these changes well in advance.
Following a public consultation earlier this year, changes to IR35 rules in relation to off-payroll working in the private sector are set to be aligned to the public sector.
IR35’s purpose is to ensure that contractors who work as employees for their own intermediary company do not avoid PAYE tax liabilities simply because they provide their services to the end-user through their intermediary company. In the private sector, it is up to the individual contractor to decide whether the IR35 rules mean they should be paying income tax and NI in accordance with PAYE rules. Most contractors working through an intermediary take a lot of their “income” as dividends as this has tax efficiencies. The Chancellor, in his 2018 Budget speech, made it clear that HMRC considers there is widespread non-compliance with IR35 in the current system and that this is resulting in lost tax revenue.
This came after, in April 2017, the Government introducing changes to IR35 in the public sector so that the public authority engaging the contractor became responsible for applying IR35 (i.e. for making the decision whether income tax and employee NICs should be deducted from payments and accounting for employer NICs in line with PAYE). Put simply, if the public authority considers that IR35 applies, it (and not the contractor) is responsible for operating PAYE and NICs on the fees it pays to the Intermediary company.
The Chancellor announced in the 2018 budget that these changes will now be rolled out to ‘medium and large’ organisations in the private sector. He did not state what ‘medium and large’ will mean.
Practical steps to take in relation to IR35 rule changes
This change will have a significant impact on how private sector businesses engage with off-payroll contractors. The Government has not yet confirmed how large an organisation must be in order to be ‘in scope’ although it must be likely that the threshold of 250 or more staff currently applied in the public sector will be applied. Affected organisations should talk to their professional advisors to ensure that they are ready for compliance with the new rules from 6 April 2020. Employers will need to audit:
- The numbers and categories of contractors currently engaged (including those engaged through an agency).
- The terms of the contracts under which they are working.
- The likely IR35 status of each individual contractor.
Some organisations may wish to review and possibly restructure the terms upon which they engage with contractors prior to the changes coming into force in April 2020. The new rules will lead to additional costs for both the contractor and the hirer, so it may be necessary to agree which party will absorb these costs. Organisations should check that payment software/systems are able to operate PAYE and NICs whilst, at the same time, ensuring that the contractor receives the correct net payment and any VAT.
A final point to make is that this change deals only with employment status for tax purposes and not for employment purposes. Payment of a consultant under the new regime will not automatically deem them to be an employee or worker with associated employment rights. In all other respects, companies need to remain on guard against dealing with contractors as if they are employees.