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IR35 (off payroll) rules to be extended to payments made by the private sector

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Do you use freelancers or subcontractors in your business? If you do then please read on as changes to the tax rules known as IR35, are coming in from April 2020 and they may affect your business.

From next April, if you are a medium or large business, and your business uses individuals who provide their services through a Personal Service Company, it is your responsibility to decide if IR35 applies, even if the worker is taken on through an agency.

Deciding if the new rules apply

To decide if the new rules apply, check if your business is medium or large using the Companies Act definition of ‘small’ legislation for companies. There is a consultation ongoing at the moment to decide what the definition of a small business will be, if your business is unincorporated. There is more information at the end of this article. *

The next step is to look at the arrangements for the worker providing his or her services to your business. If the arrangements are such that the worker would have been regarded as directly employed if the Personal Service Company did not exist, then the new rules will apply.

The whole working arrangement must be considered so that you can come to the correct decision, not just the written terms of an agreement. There are key areas to look at though, and they are whether the worker can provide a substitute, is there mutuality of obligations between the contracting parties, can the worker be told what to do and when, how and where to do it and are there any other arrangements in place that are consistent with an employment contract, such as holiday pay.

It is important that you keep good records as evidence of your decision, should the Revenue carry out checks.

Actions to take if the new rules apply

If the new rules apply, your business must

  • Put the invoice payment through your payroll and deduct tax at Basic Rate and employee’s National Insurance Contributions from the gross payment
  • Pay employer’s National Insurance Contributions on the gross amount of the invoice, (less materials and VAT)
  • Include these payments in your payroll assessment for the apprenticeship levy
  • Give payslips for each payment, a P60 and a P45 when the contract is over

If you have engaged the Personal Service Company through an agency, you are responsible for deciding if the rules apply and you must tell the agency who will have to make the deductions and pay the employer’s National Insurance Contributions.

The new rules apply to contracts arranged from 6th April 2020, but contracts arranged before 6th April 2020 will also be caught if payment for the work will be made on or after that date.

Worker’s rights

Although tax and National Insurance Contributions are being calculated through PAYE, the Revenue advise that a worker does not have employment rights because of this.

On a cautionary note though, last year, a case was listed to be heard at Employment Tribunal. It concerned a worker who provided marketing services to the Inland Revenue through her Personal Service Company, SJW Marketing Solutions Ltd. The Revenue decided that the IR35 rules applied and deducted tax and National Insurance from the payments. The contractor argued that if she was to be treated as a worker, then she was entitled to worker’s rights, including paid holiday. The Revenue settled out of court on the morning of the hearing.

* Companies Act definition of a small business – Section 382 Companies Act 2006

To qualify as a small business, 2 or more of the following conditions must apply in a year:

  • Annual turnover less than £10.2m
  • Balance sheet total less than £5.1m
  • Fewer than 50 employees

HMRC are consulting on a definition to use for unincorporated businesses and have put forward 2 suggestions:

  • 50 or more employees or turnover of more than £10.2m, or
  • 50 or more employees and turnover of more than £10.2m

The consultation document states that where a business ceases to be small in an accounting period, the IR35 rules will apply from the start of the tax year following the end of the accounting period.

The consultation document also states that the size definition will apply to public sector bodies from April 2020.