Changes to Off Payroll from April 2020
Do You Employ Limited Company Contractors?
If yes, you need to be aware of this!
In April 2020 there will be important changes relating to the tax situation of Limited Company Contractors – often referred to as Personal Services Companies (PSC).
As the current situation stands, it is the contractor who makes the decision about whether their assignment falls inside or outside of what is known as IR35. IR35 legislation is about whether a contractor is a disguised employee or genuinely self-employed. If they are a disguised employee their remuneration should be taxed as salary (tax deducted at source); meaning they would pay more tax. Unsurprisingly the vast majority of PSC’s (Limited Company Contractors) state that they are outside of IR35 and continue to enjoy the tax advantages of this; and the government loses millions in tax revenue each year.
In April 2020 this will change. This will make the hirer, NOT the contractor responsible for making the IR35 decision. The logic being that it is the hirer who should know whether the contractor is working independently or in a similar way to an employee. Importantly those who fall inside of IR35 will be required to have PAYE and NI contributions deducted at source from their income, and liability for any non-payment of tax or NI will sit with the hirer.
However, not all private sector organisation will be affected.
Who is affected?
The change will affect medium to large sized private companies. ‘Small companies’ will be exempt. A small company will be as defined by the Companies Act 2006 and must meet two of the following qualifying conditions:
- an annual turnover not more than £10.2m
- a balance sheet total not more than £5.1m
- no more than 50 employees.
Employment Status Determination
Anyone who employs Limited Company Contractors (PSC) will need to carry out a status determination assessment. The government have provided an online employment status tool (see link below), but this has been highly criticised. However, the HMRC have indicated that if this is carried out, in good faith and is a true reflection of the working arrangements, they will not challenge it. Time will tell if this is the case.
Where someone is engaged via an agency (and not paid directly by the company), the new rules will require the Company to pass details of their employment status determination and the reasons for that decision down the contractual chain to each party (which could include one or more agencies).
Under this legislation the risk ultimately lies with the hirer. Clearly the primary risk is where the hirer decides that an assignment is outside IR35 and HMRC challenge this decision. In this case HMRC could demand repayment of lost PAYE tax and national insurance plus penalties and interest for each contractor.
After understanding these risks, it comes as no surprise that the expectation is that hirers will decide that the vast majority of assignments will be caught by IR35. This was the case when the legislation was brought into the public sector back in 2017.
If you currently use Limited Company Contractors (PSC’s) your starting point should be to a) confirm if you fall within the legislation or if you are a ‘small’ company for the purposes of the legislation and b) if this change will apply to you, carry out a status determination.
You can use the HMRC tool using this link: HMRC Status Determination
The next challenge will be to decide how to manage any situations where the contractor falls within IR35. Being taxed at source will reduce the contractors earning. They may therefore want to negotiate higher fees to compensate for this, but that will not always be possible and could significantly increase costs.
Companies may need to look at other alternatives which may include the genuine outsourcing of services or direct employment.
This change will only apply to Limited Company Contractors – not those who operate as sole traders. However, this does not mean that a simple solution would be to convert your Limited Company Contractors to sole traders. The risk here is, if they are not genuinely self-employed, they could claim employment status and the employment rights that go with this; from holiday pay to the right to claim unfair dismissal. Recent case law has seen the courts keen to find employment or worker status in these sorts of cases.
The best protection against employment law claims (and individuals claiming employment status) is still to ensure contactors work through their own limited company, but now there will be a new risk relating to tax position of contractors if the status determination is wrong. For some businesses this will mean having to re-think how they operate and the use of off-payroll workers.
You can contact Fiona on firstname.lastname@example.org
If you feel that you need guidance or advice on this matter, please call Practical HR on 01702 216573 or email Fiona on the above.