Extension of IR35

Businesses will soon need to implement robust processes to determine employment status.

What is happening?

The Employment Intermediaries Rules (commonly referred to as IR35) were introduced (with effect from 6 April 2000) to address the potential loss of revenue from individuals seeking to avoid paying employee income tax and National Insurance (NI) by supplying their services via an intermediary, eg a personal service company (PSC), taking income as dividends.

The IR35 rules impose an obligation on the intermediary to assess whether, but for the existence of the intermediary entity, the individual providing services would be deemed an employee of the end user for tax purposes (often referred to as “deemed employment status”). 

Where it was considered that an individual would be deemed to be an employee of the end user, the worker was treated as an employee of the intermediary so that the intermediary was required to calculate the amount of deemed employment income from that engagement (using the formula prescribed in the legislation) and account for Pay As You Earn (PAYE) and NI (employee and employer) to HMRC on the requisite amount.

At the Autumn 2018 Budget, the Chancellor announced the government’s intention to extend the off-payroll rules introduced for the public sector in 2017, to most private sector businesses with effect from April 2020.

Why does it matter?

One crucial difference between the new rules and those operating already in the public sector is that the end user will not only be required to pass on their assessment of the employment status (referred to as the “Status Determination Statement” (SDS)) to the worker and any intermediary (such as an agency or PSC) but also the reasons for the assessment.

It is currently unclear how much detail will need to be provided in relation to the end user’s assessment. However, businesses will need to implement robust processes to not only determine employment status, but also to document and communicate the reasons behind their decision.

There are a number of circumstances in which liabilities can be transferred to another party in the supply chain, for example, where information is not shared in the relevant time scales. The transfer provisions first apply to any entity which has failed in its obligations, then to the next entity in the supply chain and finally to the end user itself. However, the precise circumstances in which the transfer of debt provisions would be invoked and what timescales would constitute a “trigger” when there is an ongoing dispute are as yet unclear. Further guidance is expected before April 2020.

What action should you take?

1. End user clients will be required to make status determinations and provide SDSs from April 2020. They will need to ensure they have a clear process in place to receive and resolve disagreements in order to avoid both damaging the relationship with the worker or agency, and/or any PAYE or NI obligations passing to them.

2. Businesses will also need to be agile in responding to further changes or clarification of the rules as they prepare for implementation of the rules in April 2020. They also need to be ready for and alert to any future changes which may be made, such as changes expected to the employment status tests in order to align with the plans set out in the government’s Good Work Plan.

3. Liaise with your Finance and HR teams to discuss and implement your approach for dealing with the changes.

If you would like any assistance, please contact Adam Craggs or your usual RPC contact.