Karen Thomson details updates to IR35 ruling
Karen Thomson, payroll partner at Armstrong Watson, has detailed the key facts surrounding the update to IR35 ‘Off Payroll Working’ announced by the British Government as part of the coronavirus measures.
HMRC introduced IR35 in 2000 with the main aim of combating tax avoidance. It was believed that many self-employed individuals were in fact engaged in ‘employment activities’, albeit they had their own limited company.
The key issue here is when self-employed, the tax and National Insurance treatment is different to that of an employee. For the purposes of this article, many of these people are categorised as Personal Service Companies (PSCs).
PSCs were expected to understand a complex set of rules as well as changes over recent years resulting from successive case laws.
If they fell within the IR35 domain, PSCs should pay themselves under the PAYE rules i.e. set themselves up on a payroll, or perhaps use an umbrella company to do so. HMRC offer advice on umbrella companies.
In 2017 the Government decided that in order to address these issues, instead of placing the obligation on the contractor/PSC, the responsibility should fall to the organisation. In 2017 this was limited to the public sector only.
In 2018 it was announced this would be extended to the private sector with a timescale of two short years, effective by April 2020.
There has been substantial lobbying since 2018 over the administrative burden these changes would create. Industry experts have discussed the rulings at the House of Lords and some amendments have been made, however the legislation was still planned to come into force from April 2020. That was until the government announced its decision to delay the incoming IR35 rules due to the coronavirus pandemic.
IR35 regulations will not come into effect until 6 April 2021.
This gives private sector firms vital time to prepare for reform, which can only be a good thing for contractors. What matters now is that businesses use this time wisely.
You should be preparing now, so what can you be doing?
- Review your current workforce; do you have any workers that you need to assess?
- Determine whether the rules apply?
- If you are a small business and outside of the rules, ensure you advise those in the supply chain.
- Start talking to your contractors, check contracts and advise them of your status determination.
- Discuss with the business areas concerned your procedures going forward regarding the engagement of PSCs.
- Ensure you have procedures in place for any disagreements.
- If you think you might need support from tax advisors or your payroll professional/service provider contact them as soon as possible.
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